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HOME UNIVERSITY LIBRARY 
OF MODERN KNOWLEDGE 

No. 11 

Editors : 

HERBERT FISHER, M.A., F.B.A. 
Prof. GILBERT MURRAY, Litt.D., 

LL.D,, F.B.A. 
Prof. J. ARTHUR THOMSON, M.A. 
Prof. WILLIAM T. BREWSTER, M.Ao 



THE HOME UNIVERSITY LIBRARY 

OF MODERN KNOWLEDGE 

VOLUMES NOW READY 

HISTORY OF WAR AND PEACE . G. H. Peeris 

POLAR EXPLORATION De.W.S.Beuce,LL.D.,F.R.S.E. 

THE FRENCH REVOLUTION . . . Hilaiee Bblloc, M. P. 

THE STOCK EXCHANGE : A Shoet 

Study of Investment and SpecxjiiAtion F, W. Hiest 

IRISH NATIONALITY Alice Stopfoed Geeen 

THE SOCIALIST MOVEMENT ... J. Ramsay Macdonald, M.P. 

PARLIAMENT : Its Histoey, Constitu- 
tion, AND Peacticb ....... Sib Couetenay Ilbebt, K.C.B., 

K.C.S.L 

MODERN GEOGRAPHY Maeion L Newbiqin, D.S.C. 

(Lend.) 

WILLIAM SHAKESPEARE .... John Masefield, 

THE EVOLUTION OF PLANTS . . D.H.Scott,M.A.,LL.D.,F.R.S. 

VOLUMES READY IN JULY 

THE OPENING-UP OF AFRICA . . Sie H. H. Johnston, G.CM.G., 

K.C.B., D.Sc, F.Z.S. 

MEDIEVAL EUROPE ...... H. W. C, Davis, M.A, 

MOHAMMEDANISM ....... D. S. MaegolioutHj M.A., 

D.Litt. 

THE SCIENCE OF WEALTH . . . J. A. Hobson, M.A. 

HEALTH AND DISEASE W. Leslie Mackenzie, M.D. 

INTRODUCTION TO MATHEMATICS A. N. Whitehead, Sc.D. F.R.S. 

THE ANIMAL WORLD F. W. Gamble, D.Sc, F.R.S. 

EVOLUTION J- Akthub Thomson, M.A., and 

Patrick Geddes, M.A. 

LIBERALISM L. T. Hoehouse, M.A. 

CRIME AND INSANITY ..... De. C. A. Mebciee, F.R.C.P., 

F.R.C.S. 

*** Other volumes in active preparation 



THE SCIENCE OF 
WEALTH 



BY 

J. A. HOBSON, M.A. 

AUTHOR OF " THE INDUSTRIAL SYSTEM," " INTERNA- 
TIONAL TRADE,'' " THE EVOLUTION OF MODERN 
CAPITALISM," "JOHN RUSKIN, SOCIAL 
REFORMER," ETC. 




NEW YORK 
HENRY HOLT AND COMPANY 

LONDON 
WILLIAMS AND NORGATE 



,><"' 



n 

Copyright, 1911, "r^ 

BY 

HENRY HOLT AND COMPANY 



THE UNIVERSITY PRESS, CAMBRIDGE, U.S.A. 



CONTENTS 

CHAP. PAGE 

I The Meaning of Wealth 9 

II The Business and the Trade 17 

III The Industrial System 30 

IV How THE Industrial System Works .... 42 
V Costs and Surplus 64 

VI Unproductive Surplus 87 

VII Wages 117 

VIII Profits 141 

IX Exchange and Prices 164 

X Demand and Supply • . . 1S3 

XI The Labour Movement and State Socialism 208 

XII Foreign Trade 231 

XIII Human Values 249 



PREFACE 

This volume contains a study of the structure 
and working of the modern business world in 
which wealth is made and distributed as income 
to those who have made it or can lawfully get 
hold of it. It describes the ways in which the 
productive powers of Labour, Ability, Land, 
Capital and Society are applied in the various 
trades, arts and professions, for the production 
of material goods and services, and the ways in 
which the payment for this work is regulated 
and carried out. No knowledge of economic 
facts or principles is presumed, except such as 
every intelligent man or woman acquires in the 
ordinary experience of life. 

So brief a presentation of so large a subject 
will suffer necessary defects. It will be apt 
to be too unqualified in statement and too dog- 
matic in mode of argument. It will shirk some 
important points of controversy. 

Since the line of interpretation taken here 
has been more fully defended in a larger volume 
entitled The Industrial System, I may be permitted 
to refer to it those readers who may wish to 
follow out the argument in more detail. 

J. A. HOBSON. 
February 6, 1911. 

vii 



NOTE ON BOOKS 

Students desiring to follow the growth of the Science of 
Wealth in this country will begin with Adam Smith's Wealth 
of Nations, following with Ricardo's Principles, and J. S. Mill's 
Principles of Political Economy for the "crassical " theory. In 
Jevons' Theory of Political Economy they will find a challenge 
to the older theory, and a new interpretation of econonnc 
"value." The best authoritative statement of modern "or- 
thodox " theory is in Marshall's ,££inciples of Economics 
(Macmillan), while Philip H. Wicksteed's Common Sense of Po- 
litical Economy (Macmillan) presents a valuable psychological 
interpretation. 

A reliable brief account of the growth of the science may 
be found in L. L. Price's Political Economy in England (Me- 
thuen), whilst E. Cannan presents a very useful criticism of 
much of the earlier work in his Theories of Production and 
Distribution (P. S. King). In Foxwell's Introduction to Men- 
ger's Right to the Whole Produce of Labour is found an inter- 
esting account of the beginnings of socialistic theory in Eng- 
land, in connection with which Hyndman's Economics of 
Socialism and Bernstein's Evolutionary Socialism may be 
read. 

For a fuller statement of the method of description and 
interpretation adopted in this volume I may refer to my Evo- 
lution of Modern Capitalism (Scott) and The Industrial System, 
(Longmans). Among innumerable special studies of the 
facts and problems of modern industry, I would refer among 
the larger works to Booth's Life and Labour in London 
(Macmillan), and Rowntree's Poverty (Macmillan), Schloss's 
Methods of Industrial Remuneration (Williams and Norgate), 
Dr. Shadwell's Industrial Efficiency (Longmans), and Brassey 
and Chapman's Work and Wages (Longmans). _ But the largest 
ordered mass of information upon present-day industrial condi- 
tions lies in the Reports of the Poor Law Commission. 

On Finance two excellent elementary textbooks may be 
found in Withers' The Meaning of Money (Methuen), and 
Armitage Smith's Principles and Methods of Taxation (Murray) . 



THE SCIENCE OF WEALTH 

CHAPTER I 

THE MEANING OF WEALTH 

Common usage in the present day confines 
the term *' Wealth" to things capable of being 
bought and sold, measuring the amount of 
wealth they represent by the quantity of money 
they would fetch in the market. When we 
think and speak of "a wealthy man," we reduce 
to terms of money all his saleable possessions, 
including not only the lands, buildings, machin- 
ery, materials, cash, he owns and employs for 
business purposes, together with the share cer- 
tificates and other paper documents which give 
him claims upon the produce of the future, but 
also his house, furniture, pictures, books and 
other private possessions which he has no inten- 
tion of selling. All have their market value and 
his "wealth" is the sum of these values. 

The "wealth" of a nation may be estimated 
in a similar manner. Taken at any given time, 
it will consist of the total sum of marketable 
9 



10 THE SCIENCE OF WEALTH 

goods owned by tlie State and by the citizens 
who are the units of the nation. It will, of 
course, include some goods which lie abroad in 
foreign countries, and will exclude some goods 
which, though lying inside the country, belong 
to foreigners. 

The wealth of Great Britain, thus conceived, 
will not include any money estimate of her 
geographical position or climate, or any other 
natural advantages which are of use for indi- 
vidual and commercial purposes. The Thames, 
as a business asset for the nation, will only rank 
as national wealth indirectly, in so far as it 
affords facihties to businesses engaged in the 
carrying trade. There are two good reasons for 
excluding these natural advantages from a busi- 
ness estimate of national wealth. In the first 
place, they are not for sale and no market valu- 
ation can be set on them. Secondly, if such a 
valuation of cKmate, position, harbourage, etc., 
were attempted, it would cause overlapping and 
duplication in the "national accounts," for 
all these natural advantages, utihzed as they 
are for countless purposes in private businesses 
would then be reckoned twice over. 

Thus, whether we regard individuals or 
nations, it will be convenient for business 
purposes to confine "wealth" to marketable 
articles taken at their market value. This 
rule has its difficulties and its defects. Things 



THE MEANING OF WEALTH 11 

which are "wealth" in one place or at one time 
are not wealth in another place or at another 
time. When the population of a country grows, 
much land which was not wealth becomes wealth : 
water, air and sunshine pass from "free" into 
marketable goods in the rise of city rents. Though 
slave labour is far less productive than free 
labour, the emancipation of slaves in the United 
States cancelled a vast amount of private wealth. 

Again, reckoning wealth by market prices 
not merely implies a constant change in the 
amount of wealth any particular goods repre- 
sent, but changes in the wealth of a nation, or 
of the world, without any corresponding change 
in the quantity or quality of the "goods." A 
general rise or fall of prices, due to monetary 
causes, will thus produce a shrinkage or an ex- 
pansion of "wealth" which has no substance. 
Though statists can make corrections of such 
errors, the reliance upon current prices as the 
measure of "wealth" will continue to be a source 
of some confusion in the study of wealth. 

When stock is taken of the things which 
constitute "wealth," the ordinary conception 
of it will be found too materialistic. The good- 
will of a business must rank as wealth, just 
as much as its factory buildings: though im- 
material, it is saleable. Sometimes it has been 
contended that the efficiency, skill and other 
qualities of business ability or labour power. 



12 THE SCIENCE OF WEALTH 

should be reckoned in the national wealth. 
But this would be wrong. Under slavery the 
productive capacities of the slave are parts of 
the saleable commodity he is; but when persons 
are not wealth neither are the capacities that 
are inseparable from them. Only the particular 
services which they can render and hand over 
to a purchaser are wealth. Thus the skill or 
knowledge of a doctor is not wealth, but the 
operation he performs or the opinion which he 
gives upon a case is wealth. So it is with all 
sorts of professional and personal service. The 
cooking and the waiting are wealth in the same 
sense as the food which they prepare and serve: 
the lesson ranks as wealth on equal terms with 
the text-book. Where, however, personal skill 
or effort is applied to material goods so as to 
change their form or place, it is usual to con- 
sider this skill or effort as entering into the 
goods and so adding to their wealth. So wage- 
labour and work of management are not com- 
monly accounted wealth, but are included in the 
wealth of the goods they help to produce. In 
reckoning wealth from the social standpoint it 
is clear that they cannot be counted both ways, 
and it is far more convenient to count them in 
the goods whose market value they enhance. 

If stock were taken at a particular moment 
of the wealth of a man or of a nation, of course 
only material forms would count, for services 



THE MEANING OF WEALTH 13 

involve a lapse of time. But professional, domes- 
tic, recreative and other services, which are not 
merely applied to the production of material 
goods, must evidently rank as separate sorts of 
wealth, if they are sold. In any inventory of the 
wealth of a nation taken over a period of time, 
they must be included. The part they play in 
the general fund of wealth will be more evident 
when we treat of "income." 

The arrangements for producing or procur- 
ing these various sorts of tangible or intangible 
wealth we call the economic or industrial system. 
The latter term it will be more convenient to use. 
But it will require a stretching of the term 
"industry," so as to cover all those activities 
which go to make any sort of wealth, including 
the services of the judge, the clergyman, the 
acrobat, or the trade-union secretary. So not 
only the extractive industries of agriculture and 
mining, the manufacturing, transport and dis- 
tributive trades concerned with material goods 
but the work of government, the learned profes- 
sions, the fine arts, all gainful recreations and 
amusements, must be brought under the "indus- 
trial system." 

The product of all these forms of industry 
is wealth and its amount is estimated at its 
market prices. 

There is, however, another broader and widely 
different use of the term wealth which identifies 



14 THE SCIENCE OF WEALTH 

it with human welfare or well-being. " There is 
no wealth but life. Life, including all its powers 
of love, of joy and of admiration. That country 
is the richest which nourishes the greatest number 
of noble and happy human beings; that man is 
richest who, having perfected the functions of 
his own life to the utmost, has also the widest 
helpful influence, both personal and by means of 
his possessions, over the lives of others." ^ 

John Ruskin and some other prophets of 
this wider wealth have denied the validity 
and the utility of the narrower Political Economy. 
Mere statements about marketable goods, meas- 
ured in terms of money, do not, they urge, afford 
any useful information as to the ejffects of their 
production and consumption upon human life 
and happiness. Other students of society have 
also questioned the validity of separating the 
study of economic processes from that of other 
social processes and making of them a "science" 
of industry. 

This criticism, so far as it has point, is appli- 
cable to all scientific specialism. The whole 
world of phenomena is a unity of intimately 
connected parts, and every breaking off of any 
section for separate study is of necessity an act 
of mutilation. But such separate studies are 
essential to intellectual progress, and the muti- 
lation is not fatal to their use, provided that it 

* Ruskin, Unto this Last. 



THE MEANING OF WEALTH 15 

is kept in mind, and the subject of the special 
study is not treated as a completely rounded 
whole. The chief danger from such scientific 
specialism arises where the science is made into 
the basis of an art and maxims of human con- 
duct are erected on it. The scientific study of 
industry may show that certain acts of individual 
or national policy make for an increase of market- 
able wealth. To convert this "is" into a "must," 
and to urge this discovery as a sufficient ground 
for individual or national conduct, without tak- 
ing into due account other effects upon public 
welfare which may or must arise from this com- 
mercially profitable policy, is evidently unjusti- 
fiable. For when a person or a nation is con- 
sidering what line of conduct to pursue, he must 
take into account at one and the same time all 
the probable advantages and disadvantages. In 
a word, he must take for his criterion of conduct 
the wider standard of wealth which identifies 
it with welfare. The advice which the mere 
economist may offer to the statesman must 
therefore always be adjusted or corrected by 
reference to this larger conception of the public 
good. An immediately or even a permanently 
profitable business policy may be negatived by 
considerations of wider utility. 

But these admissions do not mean that either 
a science or an art of industrial wealth is invalid. 
On the contrary, both are essential to the prog- 



16 THE SCIENCE OF WEALTH 

ress of the wider science and the wider art of 
'* politics " or social conduct. Not only do we 
need to learn, by separating the industrial from 
the other social phenomena for closer inspection, 
how the industrial system is made and works, 
but we also need to know what are likely to 
be the effects of proposed changes upon the 
working of this system and the quantity of 
marketable wealth it yields. Both sorts of 
knowledge are of service to citizens and states- 
men. Neither is sufficient as a guide to conduct: 
both are but tributaries to the wider current of 
information that helps to mould the policy of the 
commonwealth. 



CHAPTER II 

THE BUSINESS AND THE TRADE 

To a young man first entering an occupa- 
tion as an artisan, clerk, tradesman or profes- 
sional man, the larger business world necessarily 
appears as a confused, intricate mass of vague 
forms and happenings, fragments of which float 
before his vision and his mind in the talk of his 
friends and neighbours, in the columns of the 
newspapers, in shop windows and street life, and 
in the acts of retail purchase in which he spends 
his earnings. His single focus of clear vision is 
furnished by the definite regular work in which 
he is personally engaged. The unity of industry, 
the very notion of it as a system, long remains 
hidden from him, or is at best a vague generaliza- 
tion. But the reality, the structure and the 
working of the business establishment to which 
he is attached soon impress themselves clearly on 
his mind. 

Though at first he may know intimately 

only the process in which he works and the 

other workers doing similar work near him, he 

soon picks up some knowledge of the other 

17 



18 THE SCIENCE OF WEALTH 

processes in his department, and, as he moves 
about and makes acquaintance with his fellows, 
he learns more of what goes on in other depart- 
ments. If it is a manufacture, he sees the raw 
materials and the finished products, and, accord- 
ing to his intelligence and interest, gets to know 
something about the machinery and the skill used 
in the several stages of the manufacture. Gradu- 
ally he will acquire a clear grasp of the business 
organization which underlies the manufacturing 
processes, the work of overseers and of the 
management, some comprehension of what goes 
on in the office where the clerks are registering 
all the doings of the factory. Even of the acts 
of buying and selling most remote from his per- 
sonal part he may get some understanding, 
especially if he is organized in a trade union with 
his fellows and learns the ways in which buying 
and selling may affect his work and wages. 

An intelligent operative thus builds for him- 
self a pretty accurate image of the material 
structure and the personnel of the factory or 
workshop in which he is engaged. The pre- 
mises, the buildings, the machinery and tools, 
the power, the raw materials and produce at 
various stages of manufacture, some money 
in the till and the bank, the various grades 
of employees and the management, will stand 
out as distinguishable features. The clerk 
in the factory office, the timekeeper, the man- 



BUSINESS AND TRADE 19 

ager, will see substantially the same picture, 
but, looking at it from a different angle of vision, 
they will see or realize some parts more clearly 
than others, and assign a different importance 
to the different parts. Disregarding human con- 
siderations and regarding the factory merely as 
an industrial instrument, it will be seen that the 
manager is in the best position to assess the 
relative importance of the various factors as co- 
operative parts in the business. This does 
not imply that the manager is more unbiassed 
or disinterested in his motives and his judg- 
ments than the workman. In both cases special 
interests will to some extent distort vision and 
valuation. The advantage of the manager is a 
technical one: he is in a better position than the 
process worker to see the various parts of the 
business in their several sizes as contributory to 
the whole. For management, as we shall recog- 
nize, is the unifying, cohesive and adjusting 
factor in the business; that manager also alone 
knows the monetary "cost" which each involves, 
and has thus a common standard measure of 
importance which he can apply. For these 
reasons it is desirable that an operative or clerk, 
who seeks to get a most reliable image of the 
business, should try to supplement his wage- 
earning point of view by seeking to assume 
that of the manager and to realize how the 
the business looks from that situation. 



20 THE SCIENCE OF WEALTH 

The business, or smallest organized unit of 
industry, thus roughly visualized, would take 
some such shape as this 




If instead of a factory, we took a mercantile 
establishment, a mine, a retail shop, a farm, 
though all the details would be different, the 
general structure would be found to be the same. 
Raw materials, stock, tools, premises, labour 
and management would all be there co-operating 
to a single industrial end, though in widely 
different proportions. In a commercial house, 
plant would play a much smaller part, there 
being little machinery or tools; materials and 
stock would be only a different arrangement of 
the same goods, and money would figure more 
prominently. In the farm, as in a mine, pre- 
mises, including land, would of course bulk far 
more largely than in a factory. Again, many 
businesses are not tightly contained in single 
premises. A bricklayer, working for a firm of 



BUSINESS AND TRADE 21 

builders, will realize the business as consisting, 
not in a fixed yard and office, but rather in a 
number of changing jobs. A railwayman will 
have to bring a wide vision and imagination to 
realize the structure of his business. 

Businesses belonging to the same trade will 
be found differing enormously in size and in 
structure. In farming at one end of the scale 
will stand the peasant working a small plot with 
his own hands for the subsistence of his family, 
at the other, some vast cattle ranch or some 
bonanza grain-farm worked by costly machinery. 
In goldmining you have the solitary placer or 
the gigantic Rand company. So in almost every 
species of industry, transport, manufacture or 
commerce. But in the handling of material 
wealth all the factors which we found in the 
factory will be present in some sort or size; 
there must always be some premises, tools, 
materials, stock, money, labour and manage- 
ment, though the last two may be performed by 
the same persons in the simplest businesses.^ 

1 The private factors of production are conveniently 
grouped under four heads as Land or Nature, Labour, Ability, 
and Capital. The separateness of these four has often been 
challenged and is not always capable of logical defence. In 
particular, it has been urged that Land might be treated as 
a form of Capital, for most land that has value is "improved," 
and the improvements incorporated with it are clearly capital. 
Moreover, for most purposes of finance and book-keeping, 
land values are included in capital. But in our concrete ac- 
count of industry it is important to maintain the distinction. 



22 THE SCIENCE OF WEALTH 

Even when applying, as we must, our wider 
conception of industry to the production of 
non-material goods, we find the same general 
outlines of the business structure applicable. 
Turning to the theatre, the doctor's or lawyer's 
"practice," the school, the hairdresser's, or any 
other organized arrangement for producing and 
selling "services," we shall find that though the 
material apparatus, premises, tools, etc., are some- 
times reduced to very small dimensions in com- 
parison with the factor of personal skill and 
energy, they are always there. Indeed, some of 
the service-producing businesses, such as a 
theatre or a school, involve a very elaborate 
material equipment which brings them under 
the most advanced form of modem capitalist 
enterprise. 

For in origin and nature Land differs from every sort of 
capital, and an intelligible theory of payment for the use of 
the factors enforces the need for the distinction. 

Concrete capital will consist, then, of (1) buildings and 
other fixtures, (2) machinery and tools, (3) materials and 
stock, (4) money. The two former are often called "fixed" 
capital, standing as they do fixed at some point in the indus- 
trial stream to assist in driving raw materials or goods towards 
their final destiny as producers' or consumers' commodities. 
The two latter, (3) and (4), are usually called "circulating" 
capital, for their industrial work keeps them moving from one 
place in the industrial system to another. 

The separateness of the factors does not imply a separate- 
ness in their ownership. In most of the smaller or simpler 
types of business the worker, or some of the workers, own 
also some of the capital or the land, and give out the ability 
required in conducting the business. 



BUSINESS AND TRADE 23 

But in our endeavour to get a firm concep- 
tion of a "business" as the unit of industrial 
structure, we are not yet out of the wood. It is 
clear that many of the factories, shops, etc., 
which we are taking into consideration are not 
separate independent businesses. They are only 
separate establishments. Though formerly it 
was very unusual for several factories, mines, 
shops, to be owned and managed by the same 
persons, it is quite usual now in some branches 
of industry. 

It is the unity of financial control that gives 
unity to a business. All the mills belonging to 
a single company must therefore strictly be 
regarded as making one business, just as all the 
retail stores of Lipton's or Wanamaker's make 
one business. Nor need a single business in this 
sense consist always of a number of mills or 
shops of the same sort in various places. It may 
extend its operations into several different trades, 
as where a great departmental store has attached 
to it a farm, a furniture removal department 
and a carpet factory, or where a railway owns 
and operates engineering works and coal mines. 
Nor is this the only way in which the plain out- 
line of the single business may be blurred. Many 
apparently separately controlled establishments 
are in their finance or management, or both, 
dependent on some larger and stronger firm. 
Many shops in such trades as tobacco, jewellery. 



24 THE SCIENCE OF WEALTH 

shoes, ironmongery, if not mere branches, are 
virtually agents selling on commission certain 
classes of articles belonging to particular manu- 
facturers or furnishers. Other workshops, pro- 
ducing subsidiary articles or executing repairs, 
are often closely attached to and dependent upon 
some big manufacturing neighbour. Many subtle 
forms exist of such connections between what 
at first sight appear separate businesses. The 
question of financial and even of managerial 
independence is thus seen to be a matter of 
degree in many instances. But it is not neces- 
sary for our purpose to require the application 
of rigorous logic in such definitions. It will 
suflBce to recognize that what binds together the 
different elements of a business, and gives it 
unity of structure and productive ejfficiency, is 
what is called the management. If a fair amount 
of discretion and substantial liberty in the con- 
duct of the establishment is possessed by the 
manager, his mill or mine or shop may reasonably 
rank as a separate business for the purposes of 
a general description of the industrial system, 
although the supreme and ultimate decision 
may be vested in some body of shareholders. 

We shall, then, treat the single complete 
establishment as a separate business for the 
purposes of our survey, except when it becomes 
necessary to give emphasis to capitalistic com- 
bination and control. The industrial system 



BUSINESS AND TRADE 25 

is thus first realized as an elaborate arrangement 
of business-cells grouped together by certain 
resemblances of form and purpose into Trades. 
Businesses making or handling the same sorts of 
goods are considered to belong to the same 
Trade, even though their methods of work may 
differ very widely. Watchmaking by hand is a 
very different sort of work from watchmaking 
by machinery, but since the products are in both 
cases watches, they are regarded as belonging 
to the same trade. 

So with other work which is partly hand 
work, partly factory work. Not only the mode 
of work but the materials may differ. Houses 
may be built of stone, wood or brick, but they 
come under the general head of the building trade. 
Generally, however, a marked difference of 
material is held to denote a different trade. So 
the iron bedstead makers are a different trade 
from the wooden bedstead makers. The test is 
the Market. Businesses that compete effectively 
for the sale of their goods in the same Market are 
taken as belonging to the same trade. But 
here, too, no hard and fast line can be drawn. 
Hand-made and machine-made watches cer- 
tainly so compete; so do wooden and wax 
matches: these evidently belong to the same 
trade. But though wooden and steel furni- 
ture compete, their competition is less close and 
their markets not identical. Gas and electricity 



26 THE SCIENCE OF WEALTH 

compete for lighting, and yet they must be classed 
as different trades. It is sometimes convenient 
to speak of the building trade, sometimes of the 
building trades. The woollen or the shoe trades 
break up into special trades, often on a local 
basis. Different grades or qualities of the same 
kind of goods sell in a different market, and are 
regarded by the makers and the buyers as dif- 
ferent trades. Again, locality is a basis for dis- 
tinguishing trades, especially when, as is common 
it involves some difference in work or product. 
So the Clyde and the Tyne have their own ship- 
building trades, the South Wales coal trade stands 
apart from other English coal-mining, Leicester 
and Northampton have their own shoe trades. 
These illustrations will suflSce to show that as 
much latitude exists in the ordinary use of the 
term Trade as in that of Business. But upon the 
whole, it is best to consider the limits of a Trade 
as defined by those of a Market, and to regard 
businesses, whose products meet and compete 
fairly closely in the same Market, as members 
of the same Trade. A Market is defined to be 
not any particular market place in which things 
are bought and sold, but "the whole of any 
region in which buyers and sellers are in such 
free intercourse with one another that the prices 
of the same goods tend to equality easily and 
quickly." 

Thus there is a world-market for Consols, 



BUSINESS AND TRADE 27 

for gold, diamonds and a few important dur- 
able goods and materials such as wheat and 
wool; for most others the national area covers 
the market; and in the case of very bulky, per- 
ishable or immovable goods, a number of small 
local markets exist. Of course inside each market 
there is room for some differences of make and 
quality and reputation, which affect the competi- 
tion and the price. 

But the main distinctions here suggested 
need not prevent us from holding that busi- 
nesses can be grouped into separate trades 
according as they are engaging in supplying 
goods to a common market. So the operative 
in a spinning mill at Bolton, or a shoe factory 
at Leicester, will soon extend his economic 
vision from the particular establishment in which 
he works to the groups of similar establishments 
which constitute, first the local, and then the 
national cotton or shoe trade. The vaguer 
looser conception of an international or world 
trade may come later as a slight qualification of 
the narrower and more practically valuable 
conception. 

Of course the unity and solidarity of his trade 
will be seen to be much weaker than that of his 
business. At first it will appear as a number of 
separate and competing businesses. But among 
the local members of a trade some concerted action 
and some organization will usually be found. 



28 THE SCIENCE OF WEALTH 

The employers in each trade are apt to meet in 
a society or federation to gain information and 
to safeguard and advance their interests relating 
to purchase of materials and labour, methods of 
production, markets, etc. The workers in the 
same trade also join together for various eco- 
nomic and social purposes. A further develop- 
ment of trade structure consists in the formation 
of a machinery of agreements, conferences and 
conciliation boards for adjusting the interests of 
capital and labour in relation to wages and other 
conditions of employment. 

The worker will thus come to set a definite 
meaning upon his Trade. In getting this laiowl- 
edge he will gather a notion of how this trade 
stands in relation to some others. He will per- 
ceive the very close dependence of his trade 
upon other trades which supply the materials on 
which he works and upon the trade or market 
which buys the product of his trade. If he is a 
shoe operative, he will find his trade especially 
affected by anything that happens to the tanning 
trade which furnishes the leather, or to the mer- 
chants or retail shops which take from the manu- 
facturer the shoes. If he is a woollen weaver, 
he will realize the close dependency of his trade 
upon the conditions of the raw wool trade on 
the one hand, the clothing trade upon the other. 
For he will see important forces that affect his 
work and wages issuing from either of these 



BUSINESS AND TRADE 29 

directions. If he carries his inquiry and reflec- 
tion further, he will make the important discovery 
that the trade in which he works is but a link in 
a chain of industries engaged in converting 
raw materials into finished goods and putting 
them into the hands of consumers. 

If he is a shoe operative he will see his chain 
running thus — 

Farmer Tanner Shoemaker Shoe merchant Shoe shops. 

If he is an engineer they will run thus — 

Mfailng Smelting Steel works Machine shops. 

But every trade will be found to have some 
other trades linked directly with it and working 
towards the production and supply of the same 
articles. There will be some branch of farming 
or mining engaged in extracting raw materials 
from Nature. Then will follow one or more 
manufacturing processes, and after that some 
wholesale and retail distributive trade. 



CHAPTER III 

THE INDUSTRIAL SYSTEM 

Our shoe operative, weaver or other special- 
ized worker, now looking out from his trade, 
will realize it as a member of a series, all bound 
together by common interest in forwarding the 
production of some particular goods. Though he 
may know little about other trades, he will 
rightly conclude that they, too, similarly run in 
series of productive and distributive processes. 
As a consumer buying various sorts of food, 
clothing and other commodities, he will recognize 
that he is tapping one end of a number of simi- 
larly constructed industrial chains. So industry 
will begin to widen out to his vision as a number 
of series or streams of processes, each series or 
stream engaged in the separate task of forward- 
ing some raw materials on the road to consumers' 
goods. He will see, not only the boots he wears, 
but the loaves, shirts, tables, books, tobacco, and 
other things he buys, as the ends and objects of 
a special series of trades. But he will soon 
observe that the separateness of the goods. 



THE INDUSTRIAL SYSTEM 31 

loaves, boots, shirts, etc., gives an exagger- 
ated notion of the separateness of the lines of 
trades through which they pass in the making. 
For he will recognize that there is no complete 
series of trades entirely devoted to making, mov- 
ing and selling boots. The farmers who supply 
hides to the tanners, supply also carcases to 
butchers, grain to millers, and enter into other 
series of products. The tanner, too, furnishes 
leather to other manufacturers besides shoe- 
makers. Many retail shops sell other articles 
besides shoes. The same will turn out to be true 
for any other series of trades. The streams of 
production merge or overlap at certain points. 
Certain early extractive and manufacturing pro- 
cesses will be found to figure in a great many of 
the series. Farmers, miners and others who get 
raw materials from Nature, must perform the 
opening process in all the great productive 
series. When their extractive work is done, the 
great variety of materials it affords is sorted and 
is put through a number of different processes. 
The later manufacturing processes are more 
numerous and more specialized, while the work 
of distributing and selling goods often brings 
together in the same trade or business a quantity 
of goods which in their manufacture belonged to 
different trades. 

If, then, we take the symbol of a stream, 
and speak of currents of industry carrying 



82 THE SCIENCE OF WEALTH 

raw materials past the different stages of pro- 
duction, until they flow over the retail counter 
into the hands of consumers, we shall find the 
stream issuing from a few sources, dividing into 
an increasing number of separate currents as it 
flows on in manufacture, and again gathering 
into comparatively few channels as it passes 
along the mercantile stages towards the consumer. 
But the actual structure of industry is, of 
course, much more complicated than this pic- 
ture would imply. Some of this complexity 
will appear comparatively early to our intelli- 
gent workman taking observations from his 
place in a factory, a mine, an office. He will 
recognize that all trades are not engaged directly 
in the work of pushing raw materials through 
the main stream of industry towards consumers' 
goods. The shoe operative will be aware that 
there are one or two trades we have not mentioned 
which are nearly as important in their bearing on 
shoe manufacture as the tanning trade itself, 
viz., the trades which supply the machinery 
and power used in his factory. This machin- 
ery and power are of course themselves the 
final products of a series of productive proc- 
esses, converting raw materials into these 
forms of capital. They do not figure at the 
end of our industrial system as "consumers' 
goods." They find their goal in becoming 
"capital," and are used up, not as commodi- 



THE INDUSTRIAL SYSTEM 33 

ties, but as plant and other aids to production. 
In examining the structure of a business we 
recognized that premises and machinery as 
well as materials were needed. It is only the 
materials which are the objects of the process 
of manufacture and which flow down the stream 
towards consumers' goods. The buildings, ma- 
chinery and other plant are used as means to this 
end. But they have to be produced, and their 
forms are gradually worn out in the work of 
assisting to make hides into leather, or leather 
into boots, or in some other useful work. 

The shoe operative, then, will see that his 
main current of trades, converting cattle into 
shoes, must be reinforced by various tributary 
trades engaged in supplying the tools, power, 
buildings, etc., required at each stage in pro- 
duction. 

Taking the single factor of machinery, he 
will correct his picture as on p. 34. 

But there are other trades which he will 
see assisting to produce and maintain the build- 
ings and other appliances of the factory, the 
light, heat and power required: these, too, he 
must fit into his fuller picture. Since it is evi- 
dent that the farmer, tanner, merchants and 
retail shopkeepers, who stand in the direct 
stream of industry, likewise use plant, machines 
and other products to assist them in their work, 
it follows that at each process the main stream 



34 



THE SCIENCE OF WEALTH 



must be fed by tributary streams whicli flow, 
not to the ultimate consumer, but to some single 
stage in production, supplying new stores of 
auxiliary goods to producers. 

Of course, if one likes, it is possible to regard 
the machinery, buildings and other plant as 
being gradually worked up into the goods they 
assist to produce, and so flowing down the main 
stream to consumption. But this view need 
not concern us here. 



Tanniii^ 



V Steel Tnakinf. 




JShoemaMn^. 



Shoe shops. 



Now these tributary trades, supplying the 
"fixed capital" to the main stream, are often 
larger and more important than the special 
trades they feed. For some of them supply 
with the same sorts of fixed capital not one 
but many trades in the main stream of indus- 
try. The iron, steel, engineering and machine- 
making trades, are important tributaries at 



THE INDUSTRIAL SYSTEM 35 

every point of the factory system. So are the 
building trades. The mining, the principal 
metal and building trades are chief supports of 
the permanent fabric of so many special trades, 
that they are often spoken of as *' fundamental" 
industries. When anything serious happens to 
any of them, the effects are soon seen in every 
part of the industrial system. 

But there are other bonds of common interest 
between the trades in the main stream of pro- 
duction besides these "fundamental" industries. 

The same sort of raw material may be utilized 
either as a chief ingredient or as a subsidiary 
in many main branches of production. The chief 
grains, timber, textile fabrics, iron, coal, stone, 
clay, etc., form raw material in the making of 
many different commodities, and the different 
trades using any one of them are related by 
powerful bonds of sympathy and antipathy. 
Such is, for example, the relation of shoe-making 
to saddlery and upholstery (through leather), 
of jam-making to biscuits or to aerated waters 
(through sugar). Where such community in' 
use of material exists, it breeds a sympathy 
between trades. For anything which improves 
or impairs the supply of their common material 
causes gain or injury to all. So far there is 
sympathy. But anything which gives one trade 
a better pull than others upon the supply injures 
these others. So far there is antagonism. Oil 



36 THE SCIENCE OF WEALTH 

and rubber are instances of the recent growth 
of two ingredients of vital importance to many- 
trades. 

Some trades are in close enduring sympathy, 
because they supply important complementary 
ingredients to one or several important industries. 
The iron and coal trades furnish the most obvi- 
ous example. But this sympathy is very strong 
in many special trades, as between the fruit- 
growing and sugar-refining trades, or wine- 
growing and bottle-making, or between the 
various trades furnishing materials to the build- 
ing trades. 

On the other hand, a keen antagonism is 
set up between certain trades by reason of the 
possibility of substitutes. When different ma- 
terials can be used to supply the same wants 
this hostility exists. Wood and iron in many 
sorts of furniture or building; cotton, wool, 
linen in articles of clothing; tea, coffee, cocoa 
among drinks, will serve as instances. So elec- 
tricity, gas, oil and steam compete against one 
another as sources of industrial, locomotive or 
domestic energy. These trades, and others 
subsidiary to them, are thus brought into con- 
flict, and anything which benefits one is apt to 
injure the others. The substitution may some- 
times be in materials, sometimes in process, 
sometimes in final commodities; but wherever 
it operates it breeds opposition. 



THE INDUSTRIAL SYSTEM 37 

Among what first appear as separate trades 
engaged in converting raw materials into com- 
modities, we perceive, then, many connecting 
bonds of union and opposition. The series of 
industrial processes cross, fuse and separate at 
various points; no series runs a completely- 
isolated course. 

But there are two sorts of industry which 
deserve particular attention as unifying influences, 
viz., transport and finance. They are not funda- 
mental like mining and agriculture, but pervasive 
and connective. Wherever any business is 
carried on, a constant conveyance of materials 
to the business, and of finished goods from the 
business, is involved; every act of buying and 
selling involves some act of conveyance. The 
group of trades concerned with such conveyance 
must, therefore, occupy a place of peculiar 
prominence in the industrial system. Taken 
as a whole, they form an apparatus correspond- 
ing to the vasomotor system in an animal organ- 
ism. In one sense, indeed, all physical work is 
movement of matter, and much of it forms 
part and parcel of every business operation. 
But in modern industrial societies transport in 
its special sense, the conveyance of persons, 
goods and intelligence from one place to another, 
becomes a highly specialized and important work. 
The railway and the steamship find a place 
in almost every series of productive processes. 



38 THE SCIENCE OF WEALTH 

They furnish the physical links that give effi- 
ciency and continuity to the whole movement. 
Any stoppage of a great railway or a great 
shipping service paralyses a whole industrial 
area: even the cutting of telegraph-wires con- 
fuses and retards the whole working of industry. 
As industry becomes more complex, materials 
and labour are drawn from more distant and 
more numerous places to take part in more deli- 
cate and complex processes of co-operation and 
the commercial working of the system depends 
more and more upon rapid and reliable informa- 
tion about their movements. For this reason 
transport is found in every civilized country 
to play a larger and more imposing part in 
industry, absorbing an increasing proportion of 
capital and labour, and presenting the most 
critical problems of control. When, as is the case 
in many large countries, the railroad is the sole 
effective means of transport, it may wield a 
power over the life, prosperity and industry of 
the population which is despotic unless the 
government intervenes. Every improvement of 
transport facilitates, every breakdown of transport 
damages, simultaneously, all the industries con- 
cerned with the production of material wealth. 

Equally pervasive and more authoritative in 
its general control over all modern industry 
is finance. Under that term we include all busi- 
ness connected with the production, protection 



THE INDUSTRIAL SYSTEM 39 

and conveyance of money, or purchasing power, 
and with the creation of and deaHng in stocks, 
shares and other negotiable securities. We saw 
that our science is concerned entirely with things 
that have a marketable value and with processes 
each act of wliich involves a purchase. So it is 
obvious that the industries concerned with the 
production and application of purchasing power 
are in their influence as critical and as pervasive 
as the work of physical transport. The familiar 
saying "Money makes the world go round'* is a 
popular testimony to the importance attach- 
ing to the sort of business enterprises which 
produce and regulate the supply of financial 
power. The forces issuing from finance are 
operative everywhere throughout the industrial 
order. A great banking crisis paralyses all 
industrial activities as surely and even more 
completely than a breakdown in the railway 
system. 

Thus, though we recognize a certain sort 
of independence and completeness in a business 
or in a trade, we also recognize a number of 
ways in which businesses and trades are related 
to and dependent on one another. The common 
use of some particular material or source of 
power, the substitution of one material for 
another, afford special bonds of amity or enmity 
between certain trades. A few farming, extrac- 
tive and manufacturing trades stand as common 



40 THE SCIENCE OF WEALTH 

starting-points for a great variety of later pro- 
cesses. The industries of transport and of 
finance present a general connective apparatus. 
But, finally, it remains to be observed that 
there exists a more general sympathy and oppo- 
sition between all trades, due to the fact that 
they draw the very breath of life from common 
sources. Fresh streams of capital and labour 
continually enter industry to maintain, invigor- 
ate and enlarge its structure and its vital energy. 
In its first emergence, as productive energy 
available for use, this fresh supply of capital 
and of labour power, the new crop of young 
labourers and of new savings, is, in a "free" 
country, at liberty to apply itself to any special 
sort of industry, and all trades must draw for 
their needs upon this common and constant 
supply. They have, therefore, a supreme com- 
mon interest in the size, quality and reliability 
of this supply, and in the terms upon which 
it is procurable. So every cause affecting the 
volume, the fluidity and the efficiency of the new 
capital and labour in a community, will affect 
all the several trades. As we examine the work- 
ing of the industrial system in more detail, we 
shall see that many barriers block or impede the 
free flow alike of labour and of capital. But so 
far as labour and capital have liberty to enter 
different trades, or to transfer themselves from 
one employment to another, they must be re- 



THE INDUSTRIAL SYSTEM 41 

garded as forming common funds of industrial 
energy pulsing through the whole framework of 
industry, as the blood courses through the 
various organs and cells of the body, giving 
organic unity to the entire system. 



CHAPTER IV 

HOW THE INDUSTRIAL SYSTEM WORKS 

Part I 

We have now obtained a compreliensive pic- 
ture of an industrial system in which many 
clusters of businesses are grouped into trades, 
while these trades are arranged in order by 
series to carry on the work of converting the 
raw materials and forces of Nature into com- 
modities and services for the use of man. The 
diagram on p. 48 presents the main features of 
this picture. 

The mechanism of industry, continually tak- 
ing in fresh supplies of materials from Nature 
by means of the extractive processes, carries 
them through a series of manufacturing, trans- 
port and commercial processes which changes 
their shape, composition or place, until they 
finally are tumbled out of the retail "hopper" as 
consumers' goods. 

At each stage in the process stand supplies 
of the factors of production, land, labour, fixed 
42 



HOW THE SYSTEM WORKS 



43 



capital, ability, engaged in this regular work of 
forwarding production, and all these factors, as 
they are used up or worn out in their produc- 
tive work, are replaced by new factors themselves 
composed of materials drawn from Nature and 
prepared by a series of productive processes 
for the place they are to occupy. So the indus- 
trial system has its many suckers in Nature, 
everywhere drawing out materials and forces 
to be worked up, partly into consumers' goods, 
partly into new instruments of production. 




However intricate the system may be, there 
is nothing mysterious about its actual working. 
Every one knows, or can find out, how the chief 
kinds of materials, such as grains, fruits, animals, 
timber, textiles, coal, clay, metals, are worked 
up by different trades into the immense variety 
of finished articles which we use. The regular 



44 THE SCIENCE OF WEALTH 

course of their productive career sometimes calls 
forth the image of a river, sometimes of a machine, 
sometimes of an organism. The organic meta- 
phor is the most useful, suggesting the likeness 
of industry to the processes of taking in food, 
digesting and assimilating it, converting it into 
working energy and new tissue, and excreting the 
waste. But none of these images is quite cor- 
rect. All suggest more regularity and more 
smoothness of action than actually exist. None 
of them takes proper account of one essential 
fact, viz., that each productive act done to the 
material in any process requires the co-operation 
of a number of conscious agents, the owners of 
the different factors of production that are used. 
The bodily and mental energy of countless little 
business groups in a workshop or factory, a 
mine, a railway station, a warehouse, must 
be got into play over and over again to perform 
the innumerable acts required to keep materials 
moving down the industrial stream. These acts 
are separate productive acts and they require 
the application of separate stimuli. How is the 
constant stimulation applied? Here again there 
is no mystery. Through the industrial system 
there is a constant flow of money which quite 
evidently performs the work of calling forth the 
application of industrial energy from the owners 
of the different factors of production. This 
flow of money moves in the reverse direction to 



HOW THE SYSTEM WORKS 45 

the flow of materials and goods. The latter fl^w 
from the extractive processes through the manu- 
facturing and distributive processes until they 
pass over the retail counter. The former enter 
the system chiefly at the retail counter and 
move up through the distributive, manufactur- 
ing and extractive processes in due course. 

Take as an example the series of trades con- 
cerned with producing boots. 

The regular working of the boot trade re- 
quires that at each stage there shall be disposed 
a proper amount of factories and other fixtures, 
machinery and tools, employers and workmen, 
engaged in converting hides into boots and 
placing the boots in the possession of wearers. 
All this apparatus is kept in being and in opera- 
tion by a continual succession of payments of 
money made to the workers, employers, capitalists, 
landowners at the several stages of production. 
These payments for the factors of production 
constitute wages, profits, interest, rent. Whence 
do they come and how are they paid.^ A prac- 
tical answer to these questions is given by posting 
oneself at the counter of a ready money shoe 
store doing a regular business with a turn-over 
of, say, £100 per week. Customers buy and 
take away shoes, paying for them in cash. What 
does the shopkeeper do with the £100 he thus 
receives? Out of it he pays the weekly wages of 
his employees, sets aside something towards the 



46 THE SCIENCE OF Y/EALTH 

quarter's rent and towards the interest on his 
borrowed capital, replenishes his stock, and keeps 
what remains as wages of management or profits. 
All these payments are necessary stimuli to the 
retail process in the shoe series. They induce 
the owner of some factor of production to apply 
it in a new productive act which helps to main- 
tain the supply of shoes intact in the retail store. 
The £100 we see is partly used to pay wages, 
interest, profit, rent in the retail business. These 
costs of retailing do not, however, take more 
than, say, £20 out of his £100. The £80 is 
handed on to the wholesale merchant, in an 
"order" for more shoes to replace in the retail 
store those which have been sold. The merchant 
who receives this £80, in his turn, appHes part 
of it to pay the wages, rent, interest and profits in 
his ofiice and warehouse, the rest, say £60, he 
uses to buy shoes from the manufacturer to re- 
place those he has sold to the retailer. Similarly 
the manufacturer pays out of his £60 his cur- 
rent costs of production, say £30 in wages, rent, 
interest and profit, laying out the other £30 in a 
new purchase of hides and other materials. The 
tanner receiving £30 from the manufacturer will 
make a similar apportionment of the money at his 
stage of production, paying the farmer £15 for 
some fresh hides, which sum the farmer in his 
turn will use up in the payments he is called upon 
to make for raising cattle. 



HOW THE SYSTEM WORKS 47 
Here is the process we describe — 




Farm Tannery StweFactorf Shoe^Iarket SlweStora 

It matters not whether the proportion given 
here for the distribution of the £100 spent on 
shoes corresponds to any known condition of 
the trades. What is certain is that the £100 paid 
over the retail counter circulates through the con- 
nected series of trades in the way described, that 
each payment out of it directly evokes a new 
productive activity, and that this is the means 
by wliich the industrial system is kept working. 
The prices paid in demand for finished goods are 
broken up and circulate through the productive 
processes, so as to maintain at each stage the 
activities required to keep up the supply. 

If for boots we substitute loaves, shirts, books, 
bicycles, or any other article, the same analysis 
applies. The retail prices paid for the finished 
articles break up into a number of payments 
made at the different stages of production. 

It will no doubt occur to some that trade, 
even under ordinary conditions, does not work 
in quite this simple, regular fashion. The credit 
system, for instance, does not always oblige a 
shopkeeper or a merchant to wait for cash from 



48 THE SCIENCE OF WEALTH 

the customer in order to pay his way. The man- 
ufacturer, again, does not always wait for the 
merchant to order goods and to accompany the 
order by payment. He often produces in ad- 
vance, and himself tries to stimulate demand. 

But these niceties of actual commerce may 
be ignored in a presentation of the fundamental 
facts. It is evidently correct to say that in the 
regular working of the industrial system money 
enters as the universal stimulus through de- 
mand for commodities. Such demand visibly 
acts as the "demand" for labour, capital, land, 
ability, in each of the several processes. 

The simplicity of our illustration requires, 
however, one qualification. Our picture of the 
industrial system showed that at each stage a 
tributary set of processes was engaged in fur- 
nishing the buildings, machinery and other fixed 
capital. It is evident that the "wear and tear" 
of this capital must also be provided for out of 
the only course available, viz., the retail payments 
for commodities. When, therefore, we assign at 
the retail stage £20, out of the £100, as costs, a 
part of which is to be paid to Capital, that pay- 
ment must include depreciation or provision 
against wear and tear. Similarly with the pay- 
ment made for capital in the warehouse, the fac- 
tory, the tannery, the farm. Whenever fixed 
capital is used, some addition must be made to 
the payment so as to stimulate those tributary 



HOW THE SYSTEM WORKS 49 

trades required to reproduce the buildings, 
machinery and other plant which are continu- 
ally being worn out. 

If, then, we apply to the economic system 
as a whole the working model furnished by the 
series of trades engaged in making and selling 
shoes, we seem to have a clear picture of it both 
as an industrial and a financial system. The 
constant regular flow of all sorts of raw materials 
through the various extractive, manufacturing, 
distributive processes, each furnished with a 
proper quantity of the different factors of pro- 
duction organized in businesses and trades, gives 
the industrial aspect. Its financial counterpart 
is a corresponding flow in the reverse direction 
of money, put in at the retail end, and working 
its way up the stream, stimulating, as it passes, 
each factor of industry so as to evoke a fresh 
activity. 

Part II 

This picture of the circulation of goods and 
money appears to give equal prominence to 
the two. To do this, however, would be unduly 
to exalt the part played by money in the indus- 
trial system. Though to the business man con- 
sidering his investments and his profits, money 
often figures as the end and object of his activity* 
this is not actually the case. 



50 THE SCIENCE OF WEALTH 

Important as money is, it is a means and not 
an end. A means to what? A means to the 
distribution of industrial energy on the one hand, 
and of industrial products on the other. As it 
circulates about the system, it is seen bringing 
labour, land, capital, ability, in different sorts 
and sizes, to the places where they are wanted, 
and apportioning the product among the owners of 
these factors. Since production is admittedly a 
means to consumption, the distribution of the 
industrial product must be accounted the pri- 
mary object for which money is used. We have 
seen how money orders and stimulates industry 
in its various stages. It remains to recognize that 
this stimulation really takes shape through a 
distribution of the product. Money itself has 
no power to stimulate industry. Though habit 
makes money seem an end, a thing desirable on 
its own account, this of course is an illusion. The 
labourer wants not money but money's worth. 
So does the capitalist in seeking the payment of 
his interest, and the landlord in the payment of 
his rent. The actual work, then, upon which 
Money is engaged, as the retail payments dissolve 
and circulate through the system, is the distribu- 
tion of the varied products of industry. 

In the particular series of processes which end 
in the sale of boots, the sole product consists of 
boots, and if a primitive distribution prevailed, 
the wages, rent, interest and profits along the 



HOW THE SYSTEM WORKS 51 

whole line would be paid in boots, which each 
recipient would have to wear, or to "swop" 
against bread, shirts, or some other goods paid in 
similar fashion as wages, rent, etc., in some other 
line of production. Then, at the close of an in- 
tolerable series of acts of barter, the shoe opera- 
tive might get as the product of his labour, not 
shoes, but various other commodities, which are 
what he wants. Money was invented to save the 
risks and trouble of such barter, and to enable 
every special sort of worker to be paid in general 
wealth. For the money- wage he receives is noth- 
ing else than a general order upon the product, 
not of this or that set of trades, but of the whole 
industrial system. The tendency of civilization 
is to confine each worker ever more closely to a 
single narrow sort of work, a bit of a single process 
in one trade: the money- wage he gets reverses the 
process, putting him in possession of a bit of the 
product of every other trade. So, though he is 
only a laster or a finisher in his own trade, he is 
likewise miller, baker, spinner, weaver, car- 
penter, etc., through his capacity to get a share 
of the product of each of these other trades. 

As a producer he is specialized, as a consumer 
he is generalized. It will be well to realize clearly 
how this transformation of special worker into 
general consumer is brought about. How is it 
that a worker in a shoe factory, whose work may 
consist in nothing else than stamping leather. 



52 THE SCIENCE OF WEALTH 

can change his services into loaves, shirts, chairs, 
tobacco, etc.? His particular work is worthless 
taken by itself; stamped leather is of no use to 
any one. Only when the stamped leather has 
passed through various other processes, and, 
being made up into shoes, has been sold to a cus- 
tomer, is the utility of his work realized. Then 
out of the money-payment, which measures the 
social utility of the whole set of shoe-making 
processes, he gets his share. CHcking, lasting or 
finishing has thus been converted into money 
by means of the sale of shoes. The clicker, laster 
or finisher, can now take pieces of this money, 
and going himself to one retail shop after an- 
other, can convert it into the loaves, shirts, to- 
bacco, etc., that he wants. As he buys loaves at 
the baker's he sets a money stimulus at work 
along the line of processes which go to make bread : 
the baker and his assistants, the miller and his 
men, the farmer and his labourers, get each 
a bit of the money our shoe operative has paid 
for loaves, and each of them with it buys at 
the retail shops the various articles he needs. 
Among these articles are shoes. So, some of the 
very money which, paid over the shoe-counter, 
passes to the shoe operative in wages, is the 
money with which the shoe operative himself 
bought loaves. The shoe operative needs bread, 
the baker and miller need shoes. We see how 
money, the price of shop-goods, enables each 



HOW THE SYSTEM WORKS 53 

to supply his needs by exchange with the 
other. 

Let us, however, set out this process of ex- 
change a Httle more fully. Take the representa- 
tive needs of man, say, loaves, boots, shirts, 
coats, chairs, meat, sugar, milk, books, crockery. 
Apply to each of these our image of a stream of 
production, each product having a separate 
series of four processes engaged in producing it. 
Suppose these to be the only economic wants, and 
that each man in the community wants the same 
amount of each. For convenience, substitute 

A, B, C, D, etc., for these ten products. The 
producers of A will then spend one-tenth of their 
pay in buying A, the commodities which they 
help to produce, one-tenth in buying B and one- 
tenth in buying C, and so with each of the other 
seven products. Similarly, the producers of 

B, C, or one of the other sorts of goods, will 
spend his pay, each using one-tenth to buy the 
finished products of the series of processes in 
which he works, the other nine-tenths to buy 
equal amounts of each of the other products. 

It matters not where any man happens to 
be working as A^, B^ or D, he will take his pay, 
and apply one-tenth of it at each of the retail 
stages, A^ B\ C^ D^ etc., so using an equal pro- 
portion of it to stimulate each series of trades. 
In this way the general product of the industrial 
system would be seen to be distributed in its 



54 THE SCIENCE OF WEALTH 

entirety among all the different groups of special 
producers. The means by which this distribu- 
tion was accomplished would be the money 
paid at each stage of production out of the retail 
prices of the finished products. 



A' 


A' 


^2 


^1 


A 


B' 


B' 


B^ 


^1 


B 


C' 


C' 


C' 


CI 


C 


7)4 


Z)3 


1)2 


Z)i 


D 


E' 


E^ 


£2 


El 


E 


F' 


F3 


F2 


F^ 


F 


G^ 


G' 


G2 


G^ 


G 


W 


H^ 


IP 


H^ 


H 


P 


P 


p 


P 


I 



K' K' K^ Ki K 

Though the actual process of exchange and 
distribution is, of course, far more complex, 
this is a true account of its essential character. 
Every man exchanges portions of his special 
product for the special products of every other 
man. So we see how the needs and actions of the 
consumer, expressed through money, form a 
perpetual bond of union between all the indus- 
trial processes. The industrial system thus ex- 
ists primarily as a great co-operative society of 
consumers. For it is the pecuniary stimuli pro- 
ceeding from consumers that are seen to main- 
tain the industrial structure at each point and 
to stimulate its regular activity. 

This industrial apparatus, thus depicted, seems 



HOW THE SYSTEM WORKS 55 

to resemble an elaborate automatic machine for 
the supply of chocolate and matches. Put a 
penny in the slot, you receive an article and its 
removal causes each other article, placed at a 
greater or less distance from the outlet, to move 
one step nearer. So in our machine the money 
paid over the retail counter stimulates a move- 
ment first along the main line of processes, then 
down the tributary trades engaged in feeding this 
branch of production. Its secondary effect, the 
spending of the income received by each class of 
producer, which applies a stimulus at each other 
retail trade, seems equally automatic. 

Thus we get an image of a fixed system of in- 
dustry, grinding out products and distributing 
them with mechanical exactitude. Every owner 
of a factor of production, worker, landlord, capi- 
talist, employer, receives a portion of the price of 
the final product his factor helps to make, the 
money accurately furnishing the stimulus neces- 
sary to maintain his factor of production and to 
evoke a new productive act. The whole product, 
constituting the "real income" of the industrial 
community, would be distributed among the 
owners of the factors, according to some law of 
mechanical necessity, just as the energy generated 
by a dynamo is applied at each point in the factory 
where it is wanted, in amounts accurately ad- 
justed to the "work" there to be done. 

The "real income" of every man, i. e, the 



5d THE SCIENCE OF WEALTH 

amount of general commodities which he got, 
and his "money income," i. e. the money pay- 
ment received for the use of his labour power, 
capital, land or ability, would be just what they 
must be to enable his factor to function. There 
would be no problem of distribution. The real 
income of the community would consist entirely of 
the aggregate of finished goods and services which 
regularly came out of the industrial machine. 

Such an account differs in two important 
ways from the actual system of modern indus- 
try. It assumes complete fixity of industrial 
structure, and it assumes that the product of 
industry leaves no surplus over what is required 
to maintain the system and evoke its regular 
activity. Now both these assumptions are false. 
The industrial system is no rigid mechanism. Its 
structure, composition and working are not 
fixed. Its constituent trades and businesses grow 
and decay or change their character. The quan- 
tity and the sorts of plant and labour and other 
factors alter with changes of industrial technique 
or of business organization, and such changes are 
always taking place. Within the last genera- 
tion, the supersession of hand-work by machine- 
work in the manufacture of shoes has completely 
transformed the structure of that trade. In every 
industry and every country similar changes are 
always taking place at a slower or a faster pace. In 
an age of industrial progress we must above ail 



HOW THE SYSTEM WORKS 57 

things study the laws of industrial growth, how 
a business or a trade increases its size and improves 
its structure and its working. 

Equally false is the second supposition, viz., 
that the product of industry only just suffices 
to supply the necessary stimuh to keep the sys- 
tem working. When the boots, loaves, shirts, 
other final commodities turned out of the various 
streams of industry* are sold, the incomes paid 
for producing them are not entirely absorbed in 
payments for the various retail commodities. 

Part of the money paid as rent, interest, 
profit, wages is not applied, as we have hitherto as- 
sumed, to demand consumers' goods. It is applied 
not at the end of the various lines of production, 
but at some interim point to cause the creation 
of new forms of producers' capital. In other 
words, it is saved, not spent. 

So important is a clear apprehension of the 
terms "saving" and "spending" that we will 
here recall our outline diagram of industry. 

If the working of this system were such that the 
quantity of consumers' goods it could turn out 
at E only just suflSced to supply the needs of the 
various owners of instruments of production 
at A, B, C, D and E, and at the different points 
in the tributary streams aS b^ c^ etc., no growth 
of the system would be possible. All the incomes, 
or money payments, made at the various stages, 
would be regularly taken to E to be spent in con- 



58 



THE SCIENCE OF WEALTH 



sumers' goods. But, if the system were able to 
turn out a larger quantity of consumers' goods 
than were required for the bare satisfaction of 
these needs, it would be possible to apply some 
part of the apparatus, not to the production of 
consumers' goods, but to the production of more 
plant and other fixed capital and to getting with 
this increased machinery of production larger 




amounts of raw materials and power. Though 
the ultimate object of such a proceeding is, of 
course, to cause more consumers' goods to be 
procured, the immediate effect is to cause less 
consumers' goods to be produced. In other words, 
some of the money paid as income to the owners 
of capital, land, labour, ability, instead of being 
applied to demand more consumers' goods at E, 
is applied at, say, a^ or c^ So, instead of money 
payments circulating, as we have shown, from E 
through the direct line of productive processes 



HOW THE SYSTEM WORKS 59 

from E to A and down all the tributaries, this 
money is applied at a^ a^, a^, or c^, c^, c^, as a 
special stimulus to the creation of more plant to be 
established at A and C. 

This is the true industrial meaning of Saving, 
the spending of money income, not in buying 
consumers' goods, but in buying producers' goods; 
not in stimulating production along the main line 
of production of consumables, but in stimulating a 
series of productive trades engaged in making 
plant or other forms of capital at some particular 
stage. This abstaining from the purchase of con- 
sumers' goods, in order to buy more plant and 
other producers' goods, is evidently the only 
means of effecting the growth and improvement of 
the material system of industry. Here again 
money is seen as the directing force. The saving 
or the spending of £1 causes directly the same 
stimulus to industry and to employment of the fac- 
tors of production, but the stimulus is applied at 
different points of the industrial system and has a 
different effect. In the case of spending it acts, 
directly down a series of main processes of produc- 
tion, evoking energy to produce consumers' goods 
which are taken out of the industrial system to 
be consumed. In the case of saving it acts di- 
rectly down a side channel of producers' processes, 
evoking energy to produce more capital goods, 
which are not taken out of the system but remain 
there as instruments of further increase of pro- 



60 THE SCIENCE OF WEALTH 

duction. To the ordinary business man saving, 
at first sight, seems a merely negative industrial 
act, i. e. not spending, and putting the not-spent 
money in a bank. But actually it is as positive an 
industrial act as spending. Indeed, as we see, it is 
spent, but in paying people to make more capital 
goods instead of paying them to make more con- 
sumers' goods. 

This is what spending and saving of income 
mean from the standpoint of the industrial or- 
ganism and society. Of course it is true that an 
individual may save in another way, by viz., 
lending his "savings" to another person to 
spend them. A great deal of "savings" passes 
in this way into the hands of spendthrift individ- 
uals or bogus company promoters and other 
business sharpers, who spend the money which 
"saving" persons thus fail to save. Such false 
saving adds nothing to industrial capital, it 
simply means that one set of persons buys con- 
sumers' goods instead of another. The "paper 
savings" thus effected are devoid of industrial 
substance. 

True saving, however, is the means by which 
the industrial system, on its capital side, grows. 
It always implies that certain individuals, in- 
stead of applying some part of their money in- 
come in stimulating production, by purchasing 
retail consumptive goods, apply it in stimulating 
production by purchasing capital goods in addi- 



HOW THE SYSTEM WORKS 61 

tion to those which hitherto sufficed to maintain 
the current of production. Some hoarding of con- 
sumable goods may be classed under saving, but 
in a general sketch of the working of industry it 
may be disregarded. The usual result of saving 
is to increase the quantity or improve the produc- 
tive quality of the industrial system, thus enab- 
ling it to produce an increased volume of goods in a 
given time, provided that a sufficient rise in the 
rate of future consumption maintains the activity 
of the increased plant. 

Turning once more to our industrial system 
as a mechanism for producing ten sorts of com- 
modities — loaves, boots, shirts, etc.; and dis- 
tributing them so that one-tenth of each sort 
passes to each of the ten classes of producers, 
we must revise our picture. If provision is to be 
made for the industrial growth of such a society, 
we must suppose that the quantity of loaves, 
boots, etc., which such a system could turn out, 
is in excess of what is needed by its members, or 
at any rate by some of them, and that some of 
the industrial energy which might have gone to 
maldng loaves, boots, etc., is able to be diverted 
into making improved machinery for flour mills 
and boot factories, or into producing new sorts of 
plant for making sorts of goods not included in the 
ten accepted lines of necessaries. This division 
of industrial energy is caused by the process 
which we call saving, or the application of pur- 



62 THE SCIENCE OF WEALTH 

chasing power at points of the industrial system 
other than the retail shop. As the application 
of money stimulates not only capital but the 
other factors, so "saving " not only causes more 
plant, machinery and other forms of capital to 
come into existence, but causes the other factors, 
including labour, to dispose themselves differently 
from what they would have done if there were no 
saving. 

For as a demand for, or purchase of, con- 
sumable goods is seen to act as a demand for 
the employment of capital and labour all along 
the series of productive processes, so a demand 
for more productive capital, due to saving, acts 
as a demand for more employment of capital and 
labour in the machine-making and other plant- 
making industries. 

In an industrial system, where progress by 
saving is thus attained, the real income is no 
longer measured merely by the quantity of 
products produced for consumption in a given 
time. The new machinery and other capital 
added during the year to that which previously 
existed, also belongs to the income of the year. 
If, therefore, we accept the sum of £1,800,000,000 
as measuring approximately the year's money 
income of the British nation, the "real " income 
corresponding to it will consist partly of the goods 
and services which during the year have been 
withdrawn for consumption by consumers, partly 



HOW THE SYSTEM WORKS 63 

of the additions made during the year to the 
various sorts of fixed and circulating capital. 
Whenever a money income has been received by 
any one as payment for the use of his labour, land, 
capital or ability, one of these two sorts of prod- 
uct, or "real " income, has been produced to 
correspond. For the receipt of such money pay- 
ment is nothing but a financial register of some 
productive act performed either by the recipient 
or by some productive instrument he owns. 
Whether tliis productive act consists in altering 
the shape of some sort of material, changing its 
place, or assisting to get it into the hands of some 
one who needs it, or whether it consists in render- 
ing some professional, official or personal service 
which ranks as "wealth," all such acts con- 
tribute to the real income of the nation, i. e. 
that sum of tangible or intangible goods which 
have a market value and have been added during 
the year to the total stock of wealth. 



CHAPTER V 

COSTS AND SURPLUS 

The product of industry, which constitutes 
the real income of a community, is, as we see, 
entirely distributed in payments to the owners 
of labour, land, capital and ability for the use 
of these factors. These payments made at the 
several stages of production are "expenses of 
production." 

These payments, we recognize, must make 
provision in a stationary industrial system 
for the maintenance of the fabric of industry, 
i. e. the various factors in their existing size 
and efficiency. In a progressive industrial 
system, such as that with which we are familiar, 
they must in addition evoke an increase and 
an improvement of the fabric. In a stationary 
system the whole of the payments, which formed 
the money income of the owners of the factors, 
would be spent in buying commodities, the 
retail goods and services turned out by the 
different series of productive processes. These 
goods and services when bought would be with- 
drawn from the industrial system and consumed. 
64 



COSTS AND SURPLUS G5 

In a progressive system a part of the income 
of the owners of the factors would be appUed 
not to buy commodities but to buy new plant 
and other forms of productive goods capital, 
which when bought would remain as a perma- 
nent addition to the structure of industry, rep- 
resenting an increased power of producing 
commodities. 

But if the size and efficiency of the indus- 
trial system is to be increased, provision must 
be made not only for increased size and effi- 
ciency of capital but for some corresponding 
increase in labour and ability. Now this in- 
crease of labour and ability is procured by buy- 
ing consumable goods which by their consump- 
tion promote economic efficiency in preference 
to buying those which do not, i. e. by what is 
called "productive" instead of "unproductive" 
expenditure. If saving persons furnish increased 
or improved machinery of production, the full 
advantage of their action can only be reaped 
on condition that the general expenditure upon 
commodities is such as to provide an increased 
quantity and an improved quality of labour and 
ability. 

This does not imply that all expenditure on 
luxuries or upon comforts and amusements 
which do not make directly for economic effi- 
ciency is absolutely wasteful and injurious. 
For there are other purposes of life besides 



66 THE SCIENCE OF WEALTH 

the economic. But it does imply that the ex- 
penditure shall be such as to provide such in- 
crease and improvement of labour and ability 
as shall keep pace with the increase and im- 
provement of the capital structure. (The in- 
creased application of land, the other factor, 
being procured by an application of new capital, 
e. g. by road-making, does not require separate 
recognition here.) In an advancing industrial 
community, then, the income will be applied 
in three ways. One part will go to costs of 
maintenance for the several factors, one to 
costs of increase, and a third to unproductive 
expenditure. Now each factor of production 
has its own costs of maintenance. First let us 
look at labour. The costs of maintenance mean 
provision of necessaries of life for the various 
grades of workers, with any further expenditure 
for keeping up the supply of labour at the exist- 
ing level of efficiency. This is commonly known 
as a subsistence wage. It just suffices to enable 
and induce a worker to keep on working and to 
bring up a family large enough to supply another 
worker to take his place when he is done. For 
various grades and qualities of labour the amount 
of this subsistence, of course, will differ. There 
will be some difference for individual workers 
in every occupation, according with their par- 
ticular physique and their circumstances. This 
provision may be regarded as a *'wear and tear" 



COSTS AND SURPLUS 67 

fund, the minimum towards which wages were 
always supposed to tend according to "the iron 
law." 

Where higher elements of skill or intelligence 
are involved in work, this bare subsistence 
may rise considerably higher than the mere 
maintenance of physical life, containing some 
provision for education, recreation and other 
forms of expenditure, so far as they are needed 
to maintain the existing fund of physical and 
mental energy. Managerial or professional ability 
may thus, even if we ignore the conventional part 
of a standard of comfort, require a relatively 
high salary as pay for bare subsistence. 

To this subsistence wage of the human factors 
must be added a corresponding provision for 
capital and land. Here an important distinc- 
tion comes out. The provision for mainte- 
nance of labour forms a part, usually the largest 
part, of Wages. But the payment for the main- 
tenance of capital is not included under interest, 
nor the payment for maintenance of land under 
rent. The maintenance of capital is furnished 
by a depreciation fund applied to replacing 
wornout or obsolete forms of plant, etc. Interest 
is an additional payment to owners of capital 
after this depreciation has been met. Similarly 
in the case of land, the provision for the re- 
placement of productive powers taken out of 
the land is not rent: a tenant must engage to 



68 THE SCIENCE OF WEALTH 

"keep up" the land and to pay rent as well. 
Economic rent, like interest, is a payment over 
and above the provision for maintenance of the 
factor of production. 

The costs of maintenance of the industrial 
system consist, then, of (1) a number of sub- 
sistence wages and salaries for the various sorts 
of labour and ability, (2) a number of '*wear 
and tear" funds for the upkeep of the various 
sorts of capital and land. These may be con- 
sidered a first charge upon the industrial product. 
Unless adequate provision is made for all of 
them, the system is starved, its fabric is "let 
down" and its productive power reduced. Such 
starvation sometimes occurs, even in countries 
where upon the whole a high development of 
industry has been attained. Under a bad mode 
of tenancy farmers may let down the land. 
Under the pressure of shareholders for divi- 
dends a railway or an industrial company may 
not make a sufficient payment out of gross 
profits into the depreciation and insurance funds; 
or a telephone or tramways business, about to 
pass under public ownership upon agreed terms, 
may fail to maintain its plant in full efficiency. 
Such incidents, however, are abnormal. In 
general the obvious self-interest of the con- 
trollers and managers of industry secures the 
payment of the costs of maintenance. 

If the whole of the industrial product were 



COSTS AND SURPLUS 69 

absorbed in these costs of maintenance there 
could be no industrial progress. But if there 
remains some surplus, after this provision has 
been made, the whole or part of it may be ap- 
plied to increasing the size or improving the 
quality of the industrial system. The pay- 
ments made for this purpose may be called 
"costs of progress." They will consist of the 
minimum payments needed to call into indus- 
trial use the various sorts and quantities of 
additional labour, land, capital and ability 
needed for effective co-operation in the enlarged 
structure of industry. Each of these additions 
involves the application of an extra stimulus 
beyond that required to secure the mere main- 
tenance of the existing factors. More or better 
labour power can only be obtained by the pay- 
ment of a wage higher than the bare subsistence 
wage. This "wage of progressive efficiency" 
will operate in several ways to increase and im- 
prove the supply of labour in any trade to which 
it is applied, or in the industrial system as a 
whole. By the higher standard of life which it 
admits, it will evoke and maintain a better 
physique and morale among the workers. Better 
food, housing and clothing will improve the 
"home," raise the standard of personal dignity 
and intelligence for the worker, enable the seeds 
of higher education to take root and to bear 
fruit in a better use of money and leisure, and 



70 THE SCIENCE OF WEALTH 

in the development and satisfaction of higher 
wants. All these improvements of the mind 
and body of the worker have their economic 
significance in the larger quantity or better 
quality of labour power he is enabled and in- 
duced to give out. Perhaps the most important 
direct result is the better care and education 
of the children, giving them a more favourable 
start in life and thus raising the efficiency of 
the next generation. This "economy of high 
wages" is, of course, attended by certain wastes, 
due to individual defects of character or bad 
customs, which impair the rate of progress and 
efficiency. But the familiar instance of a quick 
rise of wages resulting in an increased expendi- 
ture on drink need not be regarded as other than 
a passing and exceptional effect. 

Although in more civilized countries a general 
rise of wages is not now attended by an increase 
in the birth-rate, nevertheless, by reducing the 
still high infant mortality, by lengthening the 
effective working life, and by securing that 
larger mobility of labour which brings workers 
from all parts of the world to the place where 
their work is most productive, it increases the 
quantity and efficiency of the supply of labour 
in a progressive industrial system. The amount 
of income needed to evoke and sustain the en- 
larged and improved supply will, of course, 
differ in different industries, countries and con- 



COSTS AND SURPLUS 71 

ditions of the arts of industry. But these vary- 
ing wages of progressive efficiency are necessary 
"costs of progress." If the wages of any class 
of labour, or the salaries of any class of ability, 
are increased at a pace so rapid that the increase 
is not absorbed in higher efficiency, or even 
evokes a smaller or a worse output of energy, as 
sometimes happens, such payment comes under 
a different head, to which reference will be made 
lower down. 

We have seen that the payment of interest 
is not required to maintain the existing fabric 
of actual capital.^ The depreciation fund suffices 
for that. But if more or better plant, machinery, 
and other forms of capital are wanted, as they 
are in a progressive society, some positive pay- 
ment of interest is usually necessary. For 
though the time may come when a sufficient 
number of persons can be got to "save," and 
put new industrial capital into the system, on 
condition that when later on they want to spend 
what they have saved, they can do so, without 
requiring that interest shall be paid them in the 
meantime for the use of their capital, that time 

* This does not, however, imply that the payment of such 
interest is illegitimate or inadvisable. It is both legitimate 
and advisable. For if payment of interest on existing capital 
were sought to be suspended, it is likely that the owners of 
the capital would cease to make provision against deprecia- 
tion, using this fund instead for temporary payment of in- 
terest while the plant was being "let down." 



72 THE SCIENCE OF WEALTH 

has not yet arrived. A sufScient quantity of 
new plant and other capital goods can only be 
got by paying individuals to save, instead of 
spending some part of their incomes. The 
notion sometimes entertained that all interest 
is an unnecessary or a wrongful payment be- 
cause the new plant and other forms of capital 
are "produced by labour," involves a double 
error. In the first place, labour does not by 
itself, unaided and unorganized, produce any- 
thing in modern industry; it is only one of 
several co-operating factors. In the second place, 
reflection shows that saving involves among a 
large proportion of savers an effort or sacrifice 
(sometimes called "abstinence" sometimes "wait- 
ing") which is necessary to the creation and 
functioning of new capital. This effort or sacri- 
fice, like other productive services, must be 
bought and paid for. The necessary payment 
is interest. Though some saving would be 
done were no interest obtainable, the full amount 
of new capital needed and its apportionment 
among the several industries cannot be procured 
in a competitive industrial society without 
interest.^ 



* A Socialistic society, were such otherwise feasible, though 
it too must practise abstinence and "save" for any increase 
in its capital, need not pay interest to any one. It will pay 
"real interest" to itseK in the gains accruing from its enlarged 
fund of public capital. 



COSTS AND SURPLUS 73 

The payment, then, of the minimum interest 
needed to evoke the saving that shall supply 
fresh capital to feed the growing industrial 
system, is a necessary cost of progress. While 
the wear and tear fund for the maintenance of 
capital will, of course, vary in amount for differ- 
ent sorts of plant, buildings, etc., it might appear 
at first sight that the rate of interest required 
to evoke £100 worth of new capital would be 
the same whatever concrete shape the new 
capital might take. And this is actually the 
case so far as fluidity of capital and freedom of 
investment exist. It is open to every saving 
person to put his savings into a new foreign 
loan, into Canadian rails, or into any of the 
countless new industrial stocks quoted on the 
Stock Exchange. He is thus helping to build 
warships, or to make locomotives, or to furnish 
machinery and other plant to some new capitalist 
enterprise. The real rate of interest which he 
will be paid for this service will tend to be the 
same whatever investment he selects. This 
uniformity is concealed by the fact that what 
is called "interest" commonly includes an ele- 
ment of insurance against risk which is not true 
interest. If allowance is made for this pay- 
ment for risk, which differs very widely with 
different investments, the actual rate of interest, 
or payment for use of capital, will be found to 
be fairly uniform over those fields of industry 



74 THE SCIENCE OF WEALTH 

open to all saving persons for free investment. 
With the growth of modern methods of finance, 
especially the spread of joint-stock enterprise, 
an increasing proportion of the industrial struc- 
ture comes under this uniformity of interest. 
An English doctor, or shopkeeper, or skilled 
artisan, who has saved a couple of hundred 
pounds, can apply his savings to lay down rails 
in Alberta, to set up a motor plant in Birming- 
ham, to sink a shaft in the Transvaal, or to fur- 
nish electric light to some city in Argentina, and, 
allowance being made for difference of risk, he 
will get his £3, or so, for each £100 worth of 
saving that he does. This minimum interest 
will, of course, rise or fall somewhat according 
to the quantity of fresh capital required and the 
amount of surplus wealth available for saving. 
But at any given* time there is a rate of interest 
which is just enough to evoke the required flow 
of new capital into these open fields of enterprise. 
But it must be borne in mind that a large 
proportion of the business world does not lie 
exposed to the free flow of new capital. Large 
numbers of small or middling-sized businesses 
all over the world are furnished with the capital 
they need by the private savings of business 
men, supplemented by family or local borrow- 
ing. Thus in addition to a World Market for 
capital we have myriads of little detached local 
markets. In these markets there will be various 



COSTS AND SURPLUS 75 

special rates of interest, corresponding to the 
special rates of wages in the various labour 
markets. 

A rise of interest, like a rise of wages, will 
operate in two ways to evoke a larger or better 
supply of productive power. It will, in the 
first place, stimulate the owners of existing 
plant and other capital to make a fuller use of 
it. Machinery will be speeded up; where possi- 
ble, double shifts will be put in; reserve ma- 
chinery will be brought into use; credit will be 
stretched to its fullest forms, and every other 
economy of capital will be practised. In the 
second place, it will evoke more saving, caus- 
ing some persons to curtail their spending, in 
order to get the higher payment offered for new 
savings. 

What now of Land? We have seen that out 
of the product a provision must be made for 
the "upkeep" of land, but that this "cost of 
maintenance" is not rent. In a growing indus- 
trial system more use of land will be required 
to co-operate with the larger quantity of labour 
and capital. The land already employed must 
be cultivated more intensely or otherwise put 
to better use, or else land not hitherto used at 
all must be brought into requisition. Both 
these processes involve expenditure. In order 
to bring into use more land, roads must be made, 
land must be cleared, drained, fenced and other- 



7G THE SCIENCE OF WEALTH 

wise equipped for use. If land already in use 
is to be cultivated more intensely, more expen- 
diture of capital in so cultivating it is incurred, 
and a larger provision may be required to meet 
the more rapid exhaustion of the soil. In both 
cases, however, the ''cost" involved is a capital 
expenditure. It is not rent. So far as main- 
tenance and improvements are concerned land 
is capital. The payment called Rent belongs to 
a different category. 

We are now in a position to make a prelimi- 
nary reckoning of the payments or provisions 
to be made out of the annual product for main- 
tenance and growth of the industrial system. 
First, there are the costs of maintenance, or 
wear and tear fund, for the different factors of 
production. 

Secondly, there are the costs of growth, operat- 
ing in two ways: (1) by evoking a better or in- 
tenser use of the labour, land, capital or ability 
already in use, (2) by calling into use new sup- 
phes of these factors. 

If the whole product were compelled by some 
necessary law of Nature to apportion itself 
among these several uses so accurately that it 
was wholly absorbed in these costs of main- 
tenance and growth, we should have a com- 
pletely rational and socially satisfactory system 
of production and distribution of Wealth. 

So far as mere maintenance and its "costs of 



COSTS AND SURPLUS 77 

production" are concerned, powerful laws of 
necessity do compel a fairly full and accurate 
provision. For though workers in a trade may 
be "sweated," in the sense that they are not 
paid a true subsistence wage, this can only 
occur where either these workers are subsidized 
from some other source, or where this worn-out 
labour power can be replaced out of a reserve of 
"waiting" or unemployed labour kept alive out 
of some public or private charity. Apart from 
these abnormal circumstances (a consideration 
of which will be found in Ch. VII.) "sweating" 
does not pay, and a trade habitually practising 
it cannot live. The case is even clearer as re- 
gards the costs of maintenance of capital and 
land. A failure to make regular and adequate 
provision against wear and tear means nothing 
else than the starvation of the business. Indi- 
vidual unsuccessful businesses suffer this starva- 
tion, but trades do not thus perish, unless some 
change in the needs or tastes of consumers renders 
them no longer useful. A provision which may 
be regarded as almost automatic is thus made 
for the maintenance of the industrial fabric. 

But as regards costs of growth there is no 
such security for adequate provision. The sur- 
plus of wealth remaining after costs of main- 
tenance are defrayed does not automatically 
distribute itself among the owners of the several 
factors of production in such proportions as to 



78 THE SCIENCE OF WEALTH 

stimulate the new productive energies required 
to promote the maximum growth of production. 
Instead of disposing itself in these proper pro- 
portions, the surplus may be so divided as to 
furnish excessive stimuli to some factors and 
defective stimuli to others, thus retarding that 
full progress of industry which requires a pro- 
portionate growth of all the factors. 

In other words, portions of the "Surplus" 
may be wasted, or, what is the same thing, em- 
ployed "unproductively." Whenever any owner 
of a factor of production receives a payment for 
its use in excess of what is needed to evoke its 
full use he receives "unproductive surplus." 
The simplest instance is the rent of land. We 
have seen that rent is neither a cost of mainte- 
nance nor a cost of growth. Its payment does 
not affect the supply of land available for use 
in an industrial society. It is, of course, true 
that where private property in land exists, the 
payment of various rents may be necessary in 
the sense that the landowners may succeed in 
demanding them as a condition of giving the use 
of their land. But they are not necessary in the 
sense in which costs of maintenance or costs of 
growth are necessary, i. e. as payments for some 
voluntary effort or sacrifice. Their payment 
evokes no productive power. A general rise of 
rent does not bring into use an increased supply 
of land nor does a fall of rent put land out of 



COSTS AND SURPLUS 79 

use. (A rise of rent for a particular use of land, 
e, g. wheat growing, will, of course, increase the 
supply for that use, but by diverting some land 
from other uses.) If a landowner can get a high 
rent he takes it, if he can only get a low rent he 
takes that: so long as he can get some rent, 
however little, he will not refuse the use of his 
land. He will, of course, apply his land to that 
use for which he can get most rent. So long, 
therefore, as land remains in private ownership, 
it may be contended that, in order to induce 
owners to choose the use for their land which is 
most productive, they must be paid some trifling 
premium. To this extent only can rent be deemed 
necessary in the sense in which wages or interest 
are necessary. 

The same is true, however, of any payment 
of interest in excess of the minimum, say 3 per 
cent, required to evoke the quantity of saving 
needed for the growth of the industrial system. 
If capitalists, willing to apply capital at 3 per 
cent, receive 6 per cent., the extra 3 per cent, 
stands precisely on the same level with rent. 
It is unproductive surplus, stimulating and 
supporting no useful effort. It is taken because 
it can be got; if it could not be got the capital 
would be supplied just the same. The same is 
true of any element of salary or of wages in 
excess of the needs of progressive efficiency for 
ability or labour. 



80 THE SCIENCE OF WEALTH 

Any payment to a factor of production in 
excess of the costs of maintenance and progress 
thus ranks as unproductive surplus. It is a source 
of industrial waste and damage in three ways. 
First, it furnishes no stimulus to production. 
Secondly, it takes away a portion of the income, 
or annual wealth, which might have been pro- 
ductively applied, if it had passed to some other 
factor. Excessive payments to some factors 
involve deficient paym^ents to others, and since 
industrial progress depends upon proportionate 
growth of all the factors, the receipt of unpro- 
ductive surplus must be considered an obstacle 
to industrial progress. Finally, in its effect upon 
the factor to which it provides excessive pay- 
ment, it not merely does not promote activity, 
it depresses it. For as the receipt of rent, or ex- 
cessive interest or any other form of unproduc- 
tive surplus, enables the recipient to satisfy his 
wants without any output of personal productive 
energy, it must be held to have a negative in- 
fluence upon production, retarding the growth 
of industry. It acts simply as a demand for 
idleness. 

So far as the industrial system provides for 
the regular distribution of the product in pay- 
ments which stimulate the factors to maintain 
or to increase their output of productive energy, 
industrial health is secured, and complete har- 
mony prevails between the several factors. As 



COSTS AND SURPLUS 81 

it is not to the advantage of employers or capi- 
talists to refuse to labour such share of the 
product as is necessary to sustain labourers and 
their families in the level of efficiency needed to 
co-operate with capital, so it is not to the ad- 
vantage of labour to beat down interest or 
profits below the level needed to evoke the fullest 
use of capital and managing ability. Not merely 
as regards the maintenance fund, but as regards 
the application of the productive surplus, there 
is a harmony between the respective interests 
of labour, capital and ability. Friction, even 
violent conflicts, may sometimes arise through 
the failure of one or both parties to understand 
or to interpret correctly this harmony of the 
three factors. Industrial progress, doubtless, 
has often been retarded by endeavours of unen- 
lightened employers, to beat down wages at the 
expense of the efficiency of labour, or of unen- 
lightened workers to attempt to secure for 
labour higher wages or shorter hours or other 
improvements which the "profits" cannot bear. 
But so far as the industrial situation is clearly 
seen by all the parties concerned, there is a 
solidarity of interests in the proper apportion- 
ment of the costs of maintenance and the costs 
of surplus. 

Discord arises over the emergence of "un- 
productive surplus." It is not to the interest 
either of the labour or the capital in any trade 



82 THE SCIENCE OF WEALTH 

that a share of the product should be paid in 
rent. Both are prima facie gainers by a reduc- 
tion of rent, even to extinction, though we shall 
see that both do not stand an equal chance of 
securing and holding the gain. The same is 
true of any other payment of unproductive 
surplus, e. g. abnormally high interests or sala- 
ries or fees. The only true bone of contention, 
the only valid cause of conflict between capital 
and labour, land, ability, is the unproductive 
surplus. It lies in the industrial system a source 
of continual disturbance, breeding economic 
maladies. 

For this surplus of rents and other unearned 
and unproductive elements of income represents 
a large and growing volume of industrial energy 
diverted from its socially useful purposes and 
put to positively noxious uses. A large part of 
this injury consists, as we have seen, in the 
mal-distribution of the product as between the 
claims of the several factors to a share. Rent 
or excessive profits to certain forms of capital 
imply that labour and other forms of capital are 
inadequately fed for purposes of industrial 
growth. 

But there is another injury, sometimes even 
graver, which the taking of unproductive sur- 
plus causes. In our simple picture of the indus- 
trial system we have, in conformity with usage, 
left out of consideration one factor which plays 



COSTS AND SURPLUS 83 

an important part in modern industry, namely, 
the State. For though the State exists to per- 
form other than merely economic functions, a 
large and a growing part of the work of govern- 
ment is concerned with the protection and pro- 
motion of industry. The defensive services of 
the army, navy and police, a large part of criminal 
and civil administration, are concerned with the 
protection of private property and of the eco- 
nomic activities of the people. Directly or in- 
directly, the public expenditure on sanitation, 
education and other services for improving the 
physique and morale of the people, must be con- 
sidered as contributing to economic efficiency. 
Much legislation and administration, central 
and local, is industrial in its express intent, con- 
cerned with improving the conditions of labour, 
regulating the conduct of business and safe- 
guarding the interests of the consumer. 

So far as this work of the State contributes 
to the security and progress of industry, it is 
rightly regarded as a factor of production, co- 
operating with the labour, land, capital and 
ability of the individuals who engage in in- 
dustry. Although the State is not recognized 
as standing at each stage in the processes of 
industry, demanding its payment for work done, 
like the owners of the other factors, it is none 
the less true that the State must have its share. 
It also needs its costs of maintenance, and of 



84 THE SCIENCE OF WEALTH 

progress, to be paid out of the only ultimate 
source of all payments, the product of industry. 
We shall concern ourselves later on with the 
methods by which the State comes to take her 
share. It is here sufficient to recognize that 
she takes it by the same natural or reasonable 
right by which the other factors of production 
takes theirs, on the ground that she assists 
to produce it and cannot render this assistance 
properly unless she is paid her share. For unless 
proper provision is made out of the industrial 
product for the upkeep and improvement of the 
State, defective public services may bring such 
insecurity and inefficiency as will stop the jQow 
of capital and labour to the industries where 
they are needed, or prevent them co-operating 
effectively for the production of Wealth. 

The reason why it has been necessary to 
make this passing reference to the economic 
work of the State is that without doing so the 
full measure of the waste and damages involved 
in the unproductive surplus would not be un- 
derstood. For the surplus consists only in part 
of wealth diverted to owners of land and of 
favoured forms of capital and ability from other 
private factors of production. It consists in 
part also of v/ealth rightly regarded as belonging 
to the State, because it is needed for the efficient 
operation of the public services. When unpro- 
ductive surplus forms a large proportion of the 



COSTS AND SURPLUS 85 

wealth that is distributed, it entails starvation 
alike of the other factors in the private indus- 
trial system and of the State. 

Taking account, then, of the claims of the 
various factors of production, public as well as 
private, and of the scheme of distribution by 
which the industrial product is apportioned 
among the owners of these factors, we may thus 
summarize the result — 



Maintenance (cost of subsistence) 



Productive Surplus (cost of growth) B 



Unproductive Surplus (waste) 



A. Maintenance includes (1) minimum wages 
necessary to support the various sorts of labour 
and ability required for the regular working of 
the industries in their present size and efficiency; 
(2) depreciation for wear and tear of plant and 
other fixed capital; (3) a wear and tear pro- 
vision for land; (4) a provision for the upkeep 
of the public services which the State renders to 
industry. 

B. The Productive Surplus includes (1) mini- 
mum wages of progressive efficiency, to evoke 
a larger quantity and better quality of labour 
and ability for the enlargement and improve- 
ment of the industrial system; (2) such a mini- 



86 THE SCIENCE OF WEALTH 

mum of interest as suffices to evoke the supply 
of new capital needed to co-operate with the en- 
larged and improved supply of labour; (3) a 
provision for the improved size and efficiency of 
the public services rendered by the State to 
industry. 

C. The Unproductive Surplus consists of 
(1) economic rents of land and of other natural 
resources; (2) all interest in excess of the rate 
laid down in B; (3) all profits, salaries and other 
payments for ability or labour in excess of what 
would, under equal terms of competition, suffice 
to evoke the sufficient use of these factors. 



CHAPTER VI 

UNPRODUCTIVE SURPLUS 

We have seen that the actual process of dis- 
tribution consists in the innumerable money 
payments made out of the prices of finished 
articles to the different workers, capitalists, 
landlords, managers, engaged in helping to 
produce the articles. Not only are the costs 
of maintenance thus paid out, but in the prices 
paid for the use of the labour, land, capital, 
ability at each stage of production are included 
such elements of surplus, whether productive or 
unproductive, as the owners of these factors are 
able to get for themselves. 

If, then, we deem it necessary to study the 
part played by the unproductive surplus, it is 
in the buying and selling of the factors of pro- 
duction that we must study it. We must examine 
the terms upon which wages, rent, interest and 
profits are obtained. 

It will be most convenient to begin with 
the rents paid for the use of land. For rent 
evidently affords the plainest example of an 
87 



88 THE SCIENCE OF WEALTH 

unproductive surplus. As soon as thought 
began to be directed towards a science of wealth 
and industry, it was perceived that the rent of 
land differs from other payments in that the 
landowner undergoes no personal effort or sacri- 
fice, and gives out no personal productive force 
in return for the payment he receives. The 
labourer gives the productive powers of his 
body for his wages, the employer gives his energy 
of mind and his time for his profits, even the 
capitalist postpones some present enjoyment in 
order to furnish the capital for which he is paid 
interest. The landlord alone takes his payment 
for doing nothing. He has not helped to make 
the land for the use of which he is paid rent. 
It is true that sometimes he helps to improve 
the land, making it more fertile or more acces- 
sible, by expending thought and capital upon it. 
But in such cases he gets a futher remuneration 
which, though sometimes lumped along with rent, 
is not really rent. For rent, the price paid for 
the use of the natural properties of the soil, its 
fertility, its advantages of situation, is not a 
reward for anything the landowner has done, or 
an inducement for him to do anything, it is 
simply the price of certain services rendered by 
the bit of Nature which he has secured for his 
private property. If, therefore, we clear "rent" 
of other payments for improvement of the land 
we see that economic rent is entirely an un- 



UNPRODUCTIVE SURPLUS 89 

earned, entirely an unproductive, surplus. Its 
rise and its fall have no effect upon the supply 
of land; the landowner simply takes as much 
or as little as he can get. That rent in this sense 
was a surplus, differing from the payments 
made to induce workers, capitalists and employ- 
ers to apply their powers, was early and clearly 
recognized. To many early economists rent was 
the only surplus. Workers competed with one 
another for the sale of labour power until the 
wage they got was the lowest sum upon which 
they could subsist, or for which they would 
consent to work. Capitalists and employers com- 
peted with each other so that interest and profits 
tended to be cut down to a minimum. After 
these "necessary costs" of labour, capital and 
ability, had been defrayed out of the product, 
the remainder, the surplus, went to the land- 
owner. 

This was the doctrine widely accepted by 
many thinkers who were not at all concerned 
with the equity of the proceeding, and who 
drew no conclusion adverse to the rights of 
landowners to receive the rent. It is held to- 
day by many who base upon it an attack on 
private property in land, or the doctrine of 
"the Single Tax." So strong is their convic- 
tion that economic rent is the only surplus, 
the only unearned and unproductive element 
of income, that they attribute to the landlords 



90 THE SCIENCE OF WEALTH 

the power to take in increasing rents the whole 
of the increase of Wealth produced by the modern 
arts of industry, beyond the bare costs of main- 
taining the necessary stores of capital and labour. 
To their mind rent is the unproductive surplus. 
Now, if land were absolutely limited in supply 
and were a strict monopoly this view of rent 
would be substantially correct. The sole owner 
of an island would be able to take in rent all 
the product, not only of agriculture but of every 
other industry, over and above the wages of bare 
efficiency and other minimum costs of capital 
and ability. He could dictate his terms to the 
owners of the other factors, for he could refuse 
to each of them all use of land, without which 
their labour, capital or ability would be useless. 
There have been, and still are, landlords who 
possess in some localities this power almost 
intact. The squire who owns all the village with 
the surrounding country is able to impose on 
all the villagers the terms on which they shall 
work and live, fixing the rate of wages and the 
rents, the occupations, recreations, the religion 
and the politics of the inhabitants. If any one 
objects, he is at liberty to leave his native place 
and find work and a home elsewhere, if he can. 
The ground landlord in some towns has the same 
sort of power over many of his tenants. If he 
owns the whole to^vTi, or the whole of some 
district with special residential or commercial 



UNPRODUCTIVE SURPLUS 91 

advantages, he can rackrent the shopkeeper, the 
doctor or the workman, whose trade, practice or 
employment compel him to live in that town 
or district. The extreme instance is that of the 
shopkeeper dependent upon local customers. 
The landlord, on a renewal of the shop lease, can 
evidently raise the rent so as to take the whole 
or nearly the whole of the business gains attribu- 
table to the skill and industry of his tenant, or 
the increased profits due to the growing popula- 
tion and needs of the neighbourhood. 

But though such extreme cases of land monop- 
oly exist, they are the exception, not the rule. 
The power of landlordism is seldom unqualified. 
The supply of land available for any given use 
is seldom absolutely limited, and the whole avail- 
able supply does not usually belong to one man. 
Although the Duke of Devonshire may own the 
whole of Eastbourne, he could not raise his 
ground rents above a certain level, for if he did 
many would-be residents and lodging-house keep- 
ers would decide to settle in Bournemouth or 
elsewhere, and tradesmen would follow. With 
cheapening transport of persons, goods and fuel, 
a manufacturer is less bound to a particular 
locality than formerly, and the increased mobil- 
ity enables him to get land for factories, ware- 
houses, etc., on easier terms. The mere fact 
that a small number of men own all the best 
sites in a city does not give them the power of 



92 THE SCIENCE OF WEALTH 

monopolists. Most men starting a business or 
seeking a house to live in are not bound to a 
particular estate, they can choose between the 
vacant sites or houses belonging to several land- 
lords. Though London is still growing very fast, 
and all the land is private property, these facts 
have not prevented a large recent fall of rents 
in many residential neighbourhoods. A firm 
of printers, wishing to establish printing-works 
in the country, can buy or hire land at a little 
over the agricultural price. They can do so, 
because any landowner who should refuse them 
land upon such terms would know that they 
could go elsewhere and get it. The fact, then, 
that all the land of a city or a country maybe 
owned by a comparatively few men does not 
enable rents to rise so as to absorb the whole 
industrial surplus. 

Rent depends for its existence and amount 
not upon monopoly but on scarcity. For every 
sort of business some land is essential. Farmer, 
mining company, brewery, cotton factory, city 
warehouse, grocer, lawyer, must buy the use of 
some land. So rent must figure as an expense in 
every business. Every one, again, needs a bit of 
land for a residence, and so must pay a portion 
of his income as rent. Now it must be clearly 
understood that in each of these cases what is 
bought and paid for by rent is a particular sort 



UNPRODUCTIVE SURPLUS 93 

or use of land. It is arable land, pasture, market- 
garden land, suburban ground, city site for a 
house, a shop, a warehouse, a profession, that is 
wanted. Now though every sort of business 
requires some land, it is quite evident that land 
plays a much more important part in some 
businesses than in others. In farming and min- 
ing it is a factor of paramount importance; in 
the professions and in some branches of whole- 
sale trade or in finance, it is a comparatively 
trivial factor. Now those businesses for which 
very little land is needed, and for which it is not 
a matter of the first importance just where that 
land Hes, can evidently buy the use of land on 
easy terms. For their demand for land is small 
and the supply of available land for their pur- 
poses is large. They will thus be in a strong 
position to bargain with landlords, for they 
can make them compete with one another so as 
to beat down the price. On the other hand 
those businesses which need much land, or need 
land of a particular quality or position must pay 
dear for it, because their demand for the sort of 
land they want is large in proportion to the 
available supply of it. Farm rents in Ireland, 
before the time of Land Courts, were raised to 
an intolerable height, because the growing popu- 
lation in the land were compelled to seek a Kveli- 
hood in the neighbourhood where they were born 



94 THE SCIENCE OF WEALTH 

by bidding against one another for a strictly 
limited quantity of sufficiently fertile land. A 
mining company must usually come to terms 
with the owner, or one of a few competing owners, 
of a very restricted supply of coal or iron lands, 
its requirements for successful operation being 
large. We have already seen why the manufac- 
turer not tied to a particular spot is able to get 
cheap land for a new factory while the local 
shopkeeper is liable to be rackrented on each 
renewal of his lease. The difference in the 
various cases is in the pressure of the scarcity 
of land. The fact that the quantity of land in 
England is Hmited, and the fact that the quan- 
tity of land within a convenient distance of the 
centre of each town is still more limited, do not 
give landlords the power to charge what they 
Hke for most uses to which land is put. Though 
the pressure of scarcity for certain purposes in 
certain places, e. g. for shops in Bond Street, 
for banking premises in the City, for allotments 
outside some towns or villages, may give land- 
lords a tremendous pull, for many business or 
even residential purposes land can be got at 
what is held a "reasonable" rate, because the 
effective supply of suitable land, though of course 
limited, is large in comparison with the demand. 
The fact that an insurance company, making 
enormous profits, wants a site for a new branch 
office, does not enable a landowner to charge a 



UNPRODUCTIVE SURPLUS 95 

higher price than he could get from an ordinary 
shopkeeper or other business man for the prem- 
ises. For if no special advantage attaches to 
the particular site, the insurance company has a 
large supply of competing land out of which to 
choose and need pay only the current market 
rate. 

The price of land use, then, is determined 
directly not by its utility but by its scarcity, 
and that scarcity differs in different places and 
for different purposes. Land might have a high 
utility and yet obtain no rent. This is the case 
in a newly opened country with plenty of fertile 
and accessible land and a small population. 
Good land can then be had for the asking, or 
for some quite trifling sum per acre. The natural 
fertility does not enable its owner to extort a 
more than nominal price or rent, so long as there 
is plenty of it not yet taken up. Only when the 
farming population begins to press upon the fat 
lands, so that there is not any left, can a price 
or a rent be got. If in a fertile valley owned by 
several men there were room for twenty farms 
equally well placed, and there were only nineteen 
settlers, the rent would be merely nominal, be- 
cause the supply of land would be in excess of 
the demand, and each settler by making the 
several owners compete with one another could 
drive down the rent. But as soon as there were 
twenty-one settlers asking for farms the rents for 



96 THE SCIENCE OF WEALTH 

all will rise up to a considerable sum per acre.^ 
When there were nineteen settlers, land was in 
abundance, labour scarce; with twenty-one 
settlers labour is abundant and land scarce. 
It is the coming in of scarcity which gives a price 
or rent to the land. As the scarcity increases, 
up goes the price of the land for sale or for hire. 
The fertility, the contribution Nature makes to 
the productive processes of agriculture, remains 
the same. The rise of rent is due entirely to the 
intenser scarcity, i. e. to the fact that more 
persons need the use of land. 

Now most land, at any rate in a civilized 
country, is capable of being put to several alter- 
native uses. Even as agricultural land it may be 
used for pasture, or for arable, or perhaps for 
fruit-growing. If it is near a town, it may have 
other possible uses, e. g. for market gardens or 
for suburban building sites. Now, if we take 
these different uses of land in the order in which 
they are here named — pasture, arable, fruit-grow- 
ing, market garden, suburban site, it is evident 
that they represent a rising scale of rents. An 
acre of land available for all these uses would 
generally earn the lowest rent as pasture, the 
highest as suburban site; the other uses fetch- 

1 In fact, up to a sum slightly higher than the least effi- 
cient or the poorest of the twenty-one settlers finds he can 
afford to pay. 



UNPRODUCTIVE SURPLUS 97 

ing different rents between these extremes. Now 
why are pasture rents per acre lowest and subur- 
ban site rents highest? Not because the use of 
land for a house or garden is intrinsically higher 
than its use for raising cattle. These varying scales 
of rental are not determined by utility but by 
the varying degrees of scarcity which they inter- 
pret and express. An acre of suburban land 
fetches a high rent because the number of avail- 
able acres near the town is strictly limited, and 
the suburban population is growing. There is a 
scarcity of supply. An acre of pasture land 
fetches but a small rent,because there is commonly 
a large supply of remote land available for this 
use. Remove the scarcity of suburban land by 
some method of cheap quick transit which opens 
up large quantities of equally good residential 
land further out, down will go suburban site 
values. Prohibit the import of foreign cattle, 
up will go the rent of English pasture lands, 
which will now acquire a scarcity value. Though, 
then, it is the utility or service of land that is 
bought by rent, it is the scarcity of the different 
sorts of land that determines the amount of 
the rent. 

The growing needs of an increasing popula- 
tion in a country thus bestows a set of prices 
and rents for the different uses of the land, 
according to the scarcity of supply for the satis- 



98 THE SCIENCE OF WEALTH 

faction of these different needs. So, taking the 
land as a whole, an average acre of pasture will 
fetch say 10s., an acre of wheat land say 20^., 
an acre of hop land say 30^., while brick land, 
market gardens, suburban lands, will have their 
higher prices for an average acre. These may 
be regarded as the market prices for the use of 
land for different purposes. Of course there 
will be a great many of these market prices in 
different parts of the country. Each suburb, 
for instance, will have a price of its own at which, 
or thereabouts, good building land is for the 
time being procurable. 

These local or other differences are all 
matters of the degree of scarcity, the pressure 
of the needs of the population on the supply 
of land. 

The price of a particular use of land, e. g, 
for market gardening or for building, being 
thus determined, the different acres of actual 
land will of course fetch a higher or lower rent 
according to the amount of this use which they 
contain. 

If scarcity gives a value of twenty shillings 
per acre to ordinary wheat land, then wheat 
land which is better than the ordinary will, 
of course, get a proportionately higher rent, 
wheat land which is worse a proportionately 
lower. And so it will be with the rent for every 



UNPRODUCTIVE SURPLUS 99 

other use of land. What is bought and paid for 
by rent is so much utiHty of land, whether for 
wheat-growing, fruit-growing, or site-use. When 
one acre possesses a larger amount of this utility 
than another acre, of course its rent is higher, 
just as the weekly earnings of an efficient work- 
man on piece wages are higher than those of an 
inefficient workman. 

A lot of mystification has been imported 
into political economy by erecting into *'a law 
of rent" these self-evident facts that a more 
productive acre fetches a higher rent than a 
less productive acre, and that if the least pro- 
ductive acre fetches no rent or but a nominal 
rent, an acre which is ten or twenty per cent, 
more productive will pay the whole of this 
superior productiveness in rent. 

In point of fact there is no law of rent at all 
but only an application to the sale of land- 
uses of an arithmetical truism, equally appli- 
cable to the sale of everything. You buy every- 
thing because it contains something useful that 
you want, and the more it contains of that 
"something useful" the more you pay for it. 
If one acre of wheat land is twice as good for 
growing wheat as another you pay twice as much 
for it, if ten times as good you pay ten times 
as much.^ 

* This does not, however, mean that an acre yielding 30 
bushels gets a rent just twice as much as does an acre yield- 



100 THE SCIENCE OF WEALTH 

In the case of wheat land, what you buy is 
the ability of the land to produce a quantity 
of wheat in excess of the cost of cultivation. 
If that "surplus" or excess is a merely nominal 
amount, the price, or rent, paid is also merely 
nominal: if the surplus is large, the rent is pro- 
portionately large. When the necessary labour 
and capital for cultivating the land can be got 
at "cost price," the price of the land-use, the 
rent, is equivalent to the entire surplus. 

Put simply, this means that where labour 
and capital are abundant and land is scarce, 
the whole of the produce due to the co-opera- 
tion of these factors is taken by the landlord. 
In other words, rent is the scarcity -price of land: 
it is the result of what has been called "the 
niggardliness of Nature," i. e. the fact that 
in many places and for many industrial purposes 
there is a shortness of supply of fertile or con- 
venient land. 

A considerable section of "the unproductive 
surplus" passes as rent to landowners by reason 
of this scarcity. But the belief that this ele- 
ment of surplus must always and everywhere 

ing 15 bushels. That would only be the case if wheat grew 
without human labour or capital. If 10 bushels pay the cost 
of labour and capital, then 5 remain as a "surplus" for rent, 
in the worse acre, and 20 in the better acre, which in that 
case is four times as good. 



UNPRODUCTIVE SURPLUS 101 

grow, because Nature has set an absolute limit 
on the supply of land, is unwarranted. 

The supply of land-use is not fixed. The 
mere facts that nothing can be added to the 
surface of the globe, and that no considerable 
amount of land can be reclaimed from the sea, 
are immaterial. For we are concerned with the 
quantity of land-uses available for economic 
purposes. Now for these purposes the supply 
is not fixed. Great Britain, for instance, does 
not depend for her land-supply upon her own 
small acreage. For her industrial life, and her 
food, she has the world to draw upon. And the 
world is expanding, so far as effective land 
supplies are concerned. Every new railway in 
Western Canada, every improvement in irriga- 
tion in Egypt or Australia, adds more land to 
the economic supply of Great Britain and of the 
world. Moreover each improvement in the arts 
of cultivation, spreading as it does ever more 
rapidly over all civilized countries, though adding 
nothing to the area of cultivation, increases the 
quantity of productive energy got out of the 
land, which is just as good. . Modern science 
applied to agriculture is showing that enormous 
increases of yield can be obtained out of land, 
with no proportionate increase of labour. This is 
equivalent to a large addition of new fertile 
land. So far as the interior resources of the 



102 THE SCIENCE OF WEALTH 

land are concerned, the improved modes of 
discovering and working mines, so as to get 
out and obtain coal and metals, are adding 
enormously to our available supplies. If, again, 
we turn from the fertility and treasures of the 
land to the use of its surface for building and other 
occupations, we need not assume an indefinite 
and necessary increase of the scarcity which 
expresses itself in rising site- values. The spread 
of cheaper, quicker and more convenient transit 
adds enormously to the quantity of land avail- 
able for these uses, and so reduces its scarcity 
value. The effect of a cheap electric train and 
motor service in reducing town rents will be 
considerable. 

If the growth of population kept pace with 
these improvements, or if the population though 
increasing more slowly, developed standards of 
consumption making greater calls upon the use 
of land for food, housing and other material 
uses, the scarcity of land would undoubtedly 
enable landlords to take in rent a larger share of 
the "surplus." So far, however, as the civilized 
world is concerned, the net tendency appears to 
be the other way, a dwindling rate of growth of 
population with an increasing quantity of avail- 
able land. In Great Britain, though the growth 
of town life has led to a great increase of site- 
values, the total pull of land upon the surplus 
wealth has probably declined steadily during the 



UNPRODUCTIVE SURPLUS 103 

last century; not indeed absolutely, but rela- 
tively. Though no close calculation is possible, it 
is tolerably certain that the wealth of Great 
Britain has grown considerably faster than the 
aggregate of rents. 

If scarcity of land produces rent, scarcity of 
any other factor of production, capital, labour 
or ability, may be expected to yield a similar 
result. And so it does. There is only this differ- 
ence. Since the landowner undergoes no effort 
or sacrifice requiring compensation, the whole of 
rent is scarcity value. But, as we saw, labour, 
ability and capital have to receive from the 
product their costs of maintenance and growth. 
It is only what they can sometimes get in excess 
of these that corresponds to rent. Wherever, 
however, one of these other factors can get into 
the position which landlords occupy when they 
draw rent, i. e. if they can make their factor 
scarce, they can get a similar surplus. 

Because capitaHsts commonly compete with 
one another, it is sometimes supposed that the 
interest which they receive cannot contain a 
"surplus" or scarcity value. A picture is pre- 
sented of savings pouring into the industrial 
system through the various channels of invest- 
ment, and filhng up by their free circulation 
every avenue for the employment of capital 
so that all interest is forced down to a common 
level, the minimum rate sufficient to induce the 



104 THE SCIENCE OF WEALTH 

saving public to continue the saving process. 
There are, however, in this description two 
assumptions which so far as many employ- 
ments of capital are concerned, are false. The 
first assumption is, that all capital can flow 
freely into all employments, seeking the most 
remunerative investment. The second is, that in 
no branches of industry can capital be found 
scarce, in comparison with land and labour. The 
first assumption is known to be false by every 
business man. Large profitable fields of industry 
are in every country fenced off against intruders 
from outside, so that the favoured capital em- 
ployed therein can earn high dividends. If more 
capital is required by such businesses for the 
extension of their trade, existing shareholders or 
other favoured persons alone obtain the oppor- 
tunity to invest it: if capital is wanted from the 
outside public, it is borrowed at the market rate, 
those who furnish it not sharing the large earn- 
ings of the company. Well-placed capitalists do 
not let in outsiders "on the ground floor," i. e. 
giving them any share of the high remuneration 
which their capital may help to "earn." 

In every developed branch of modem indus- 
try some businesses enjoy a position of high 
remuneration for their capital: sometimes by 
amalgamation or by trade arrangements whole 
industries may be in this position. The ordinary 
investor either cannot put his savings into such 



UNPRODUCTIVE SURPLUS 105 

industries, or he must buy existing shares upon 
terms which only secure for him a minimum 
return, though the seller takes in an inflated 
price a large anticipated future gain. In the 
great manufactures, in profitable mining areas, 
in certain branches of transport business by 
sea or land, in semi-public services, in some of 
the distributive trades, in banking, insurance and 
finance, there are large blocks of well-placed 
capital obtaining for their original or present 
owners rates of interest far in excess of the free 
competition rate. Later inquiry will indicate the 
nature of the advantages which such capitals 
enjoy. Here it is sufficient to recall the notorious 
fact of their existence. There does not exist that 
perfect freedom of competition between all 
owners of capital which brings all interest down 
to a common minimum level. Large masses of 
capital are lifted to various higher levels of 
interest. Nor can it be said that these higher 
earnings are passing strokes of luck or trade 
booms. Though all dividends are liable to 
fluctuate, these strong, protected businesses are 
less liable to fluctuate than others, and their 
normal average earnings over long periods of 
years attest their power to take "surplus." 

The plain facts of modern business show that 
capital like land can get a share of unproduc- 
tive surplus. It gets it in the same way, through 
scarcity. But while land takes its surplus by a 



106 THE SCIENCE OF WEALTH 

natural scarcity, capital takes its surplus by 
making itself scarce, i. e. by artificially restrict- 
ing the flow of free capital into certain channels 
of employment. These restrictions, whether 
maintained by securing advantages of raw 
materials, power or situation, by tariffs or other 
State aid, by trade agreements or combinations, 
all signify checks upon the free entry of capital 
into a trade which is thus enabled to secure a 
scarcity rate of interest for the limited supply. 
Does any one suppose, for instance, that, if any 
company were really able to set up in England 
the business of banking so as to compete on 
equal terms with the existing banks, the earnings 
upon paid-up capital in that branch of industry 
would be what they are.^^ Capital put into a 
place of vantage, so as to be screened from free 
competition, sucks up surplus just the same as 
land. The fact that the whole of rent is "unpro- 
ductive surplus," whereas part of interest is 
earned, must not prevent us from recognizing 
the identity of the two sorts of surplus. Both 
are unearned incomes, got because the natural 
scarcity of land or the contrived scarcity of capital 
enables the owners of the scarce factor to take 
all the surplus product that remains when the 
bare "costs" of the more abundant factors have 
been defrayed. 

If the term rent be applied to all forms of 
scarcity-payments to factors of production, this 



UNPRODUCTIVE SURPLUS 107 

surplus-interest is a rent. But so is the remun- 
eration which some sorts of ability or labour are 
able to secure in excess of their wage of efficiency. 
Instances of groups of wage-earners occupying a 
position of scarcity in comparison with other 
factors of production, and thereby enabled to 
take a rate of wages in excess of the current 
demands of efficiency, are not unknown. Cases 
occur in new countries where plenty of good 
virgin soil is available and where capital is 
readier to flow in than labour. Trade-unions in 
well-organized trades have sometimes been able 
to secure for a time scarcity-wages in towns or 
districts where capital is plentiful. But these 
cases will be recognized as exceptional when a 
fuller analysis of the condition of the labour 
market has been presented. It is only the higher 
forms of human productive energy, to which 
the term "ability" is given, that show a normal 
capacity to secure scarcity pay. To the rents 
of land and capital may be added this "rent of 
ability." Now many of those who admit the rent 
of land to be unearned and recognize that capital 
may often take excessive dividends, are apt to 
boggle at the view that any part of the remunera- 
tion of ability can be rightly included under the 
same head. This is due partly to the fact that 
whereas the landowner and the owner of capital 
can live idly on the proceeds of their land and 
capital, the man of ability often gives out con- 



108 THE SCIENCE OF WEALTH 

tinuous personal productive energy. It is gener- 
ally felt not merely that he must be paid but that 
it is bad policy to stint his pay. Personal ability 
of inventors, organizers, overseers, officials, pro- 
fessional men, artists, skilled technicians of every 
sort, must be paid upon a scale sufficient to 
evoke their best work, for the higher the quality 
of the utility of the work, the greater the loss 
from failing to get it at its best. Since the nature 
of such work, its essentially intellectual, moral, 
or artistic nature, prevents the application of 
the ordinary piece and time measurements which 
regulate the pay of most manual labor, it is felt 
that a generous remuneration is advisable so as 
to be on the right side. Where, as has some- 
times happened in the co-operative movement 
or in municipal services, attempts have been 
made to buy ability cheap, this economic lesson 
has been driven home by disastrous consequences. 
But the difficulty and delicacy of ascertain- 
ing the rates of pay needed to sustain and evoke 
the various sorts of industrial ability must not 
lead to the conclusion that ability is necessarily 
worth whatever price it can get, in the sense 
that it would not work as well if it could only 
get a lower price. At present in England the 
fee among the recognized first rank of surgeons 
for a delicate and difficult operation may be 
£100. A private patient may not be able to 
get it done for less, and if he has the money it 



UNPRODUCTIVE SURPLUS 109 

may be well worth his while to pay it. In one 
sense, then, it appears to be a payment neces- 
sary to evoke the application of this sort of 
skill. But it may very well be the case that in 
Germany this operation is performed with equal 
skill for a fee of £40, or in Switzerland for £20. 
Why so much cheaper in these other countries? 
For two reasons. First, because the wider spread 
of opportunities of good higher and professional 
education bring to the front in Germany and 
Switzerland a larger proportion of natural talent. 
In this way the supply of first-rate surgical 
ability would be increased. On the other hand, 
the proportion of rich families able to pay a fee 
of £100 would be smaller in Germany and Switz- 
erland, so that the effective demand for the 
operation at such a price would be smaller than 
in England. So, with a greater supply of this 
sort of ability and a smaller demand for it at a 
high price, the fee must fall. While, therefore, I 
must pay £100 in England at the present time 
for this operation, if improved and enlarged edu- 
cation brought more first-rate surgeons to the 
front, I should be able to buy the same ability 
for, say, £20. Although, therefore, it may appear 
at first sight as if the £100 fee were a wholly 
necessary and reasonable payment for some 
rare kind of natural skill, it is evident that £80 
of it is simply a rent of scarcity, shifting up and 
down with the degree of scarcity. 



110 THE SCIENCE OF WEALTH 

Or take the case of the Town Clerk and other 
high officials of a large British Municipality. It 
is reckoned bad public policy to pay such men 
less than from £1000 to £1500 for their ability. 
But in Germany or France there is every reason 
to believe that men of at least as good qualifica- 
tions for such posts are procured at about half 
the salary. The explanation is obvious, more 
equality of educational opportunities on the one 
hand, fewer opportunities to able men of enter- 
ing other careers in which large surplus-incomes 
are frequently procurable, upon the other, bring to 
these official posts a larger number of well-quali- 
fied applicants. It is sometimes argued that a 
few high-paid places may be necessary as prizes 
to tempt a sufficient flow of ability into pro- 
fessional or business careers in which there 
are so many blanks. But whether applied to 
professional fees or to business profits, this 
gambling appeal is a bad economy. The low 
and even "sweating" salaries paid to strug- 
gling doctors and engineers can afford no eco- 
nomic defence of the necessity of the extremely 
large incomes got by a few men at the top of 
these professions. They are not warranted in 
claiming that whatever rates they are able, 
under the present circumstances, to obtain, are 
a just or permanent measure of their personal 
services. Indeed, it is quite evident that just 
as certain groups of favoured and protected 



UNPRODUCTIVE SURPLUS 111 

capitalists can take excessive interest, so certain 
cliques or grades of professional, official and 
business men of ability can take excessive salaries, 
fees or profits. These payments are of the same 
nature as the rent of land; all are scarcity pay- 
ments for a factor of production which by nature 
or contrivance is short in supply. 

Thus interpreted, such of the surplus-product 
as is not distributed in costs of growth is appor- 
tioned among the owners of the several factors 
of production in proportion to their "pull." 
The particular channel into which the unproduc- 
tive surplus flows varies in the various parts of 
the industrial system. In some countries and 
in some industries land is strongest and scarcest, 
and the bulk of the surplus goes for rent. In 
other countries and industries capital or ability 
is short and land relatively abundant; there 
interest or salaries and profits take more surplus. 

This general conclusion as to the distribution 
of the surplus is conformable with common 
knowledge in all countries where national wealth 
is on the increase. The notion, for instance, 
that in such a country as Great Britain land- 
lords are the residuary legatees who take in rent 
all surplus wealth is opposed to the plainest 
evidence of facts. Even the widest interpreta- 
tion of " economic rent" cannot assign to it more 
than some fifteen per cent, of the aggregate 
national income, while ten per cent, is a more 



112 THE SCIENCE OF WEALTH 

reasonable computation. That many wealthy 
famihes are sustained in luxury and idleness out 
of other sources of income than rent of land is 
obvious. Indeed, there is good reason to believe 
that the aggregate income in this country which 
would count as dividends or profits has during 
the past century grown at a far faster rate than 
rent. Though much of these dividends and 
profits may rightly count as "costs" for the 
upkeep and serviceable increase of the growing 
capital and organizing power in modern industry, 
there can be no question but that a great pro- 
portion is unearned or "scarcity" payment, in- 
volving no corresponding effort or sacrifice on 
the part of its recipients. The richest men in 
most advanced industrial coimtries to-day do not 
derive their riches in the main from land, but 
from the possession of other instruments of 
manufacture, transport and finance, and the 
control of markets. 



APPENDIX 

THE SOCIAL WASTE OF UNPRODUCTIVE 
SURPLUS 

The prominent position given in this analysis 
to the Unproductive Surplus makes it necessary 
here to clear away one misconception which is 



UNPRODUCTIVE SURPLUS 113 

likely to arise as to the part it plays in industry. 
Although the rents, excessive interest and other 
elements which comprise this surplus, perform 
no useful service in stimulating the industrial 
activities of their recipients, it may appear that 
their general effect upon industry is salutary. 
The luxurious expenditure which they render 
possible imparts activity to a large number of 
trades, while that which is not expended but 
saved goes to swell the industrial capital of the 
nation. Therefore, though this surplus is not 
"productive" in the sense of sustaining or evok- 
ing the productive energy of those who receive 
it as "unearned income," it may be thought to 
be productive in its further uses, whether it 
be spent or saved. But a closer scrutiny dis- 
poses of this notion. For, as regards the portion 
that is expended upon luxuries, it adds nothing 
to the total volume of industry and employment. 
If, instead of passing as unproductive surplus to 
a receiver of rent or excessive profits, it were 
assigned by a more equitable distribution as 
"efficiency" wages to labour, it would still have 
been spent in demanding commodities. These 
commodities, instead of being luxuries for the 
rich, would have been conveniences of life for 
working famiKes. Instead of increased employ- 
ment being afforded in the luxury trades, the 
same amount of increased employment would be 
imparted to the trades producing working-class 



114 THE SCIENCE OF WEALTH 

conveniences. But the consumption of the 
luxuries would contribute nothing to the working 
power of the industrial system, whereas the 
working-class expenditure would leave as a 
result an improved efficiency of labour-power. 
So much for the portion of the "unproductive 
surplus" spent on luxuries. 

It may seem that the portion which is saved, 
at any rate, must be industrially beneficial. 
"Unproductive surplus" saved and put into 
new forms of capital, it may be argued, is quite 
as beneficial as higher wages expended in raising 
the efficiency of working-class famihes. More 
capital is as serviceable as more labour-power. 

But it cannot be taken for granted that sur- 
plus which is saved and put into more capital 
is of necessity as socially serviceable as if the 
income which formed that surplus had gone to 
raise wages and the efficiency of labour. For we 
have recognized that industrial progress depends 
upon a rightly proportioned increase of the 
different factors of production. If then there 
were a tendency to increase new capital at a 
faster rate than the efficiency of labour were 
increased, such a tendency would be wasteful, 
regarded from the standpoint of society. Now 
the "saving" of large masses of unproductive 
surplus causes just this sort of waste. For to 
make large additions to the capital structure of 
industry, while the efficiency of labour is not 



UNPRODUCTIVE SURPLUS 115 

proportionately increased, has two injurious 
effects. First, it upsets the adjustment of the 
factors of production, labour lagging behind 
capital as a productive power. Secondly, it 
stimulates production beyond the pace required 
to supply the final commodities to consumers, 
and so brings about the periodic congestions of 
the markets which are seen in trade depressions. 
This is the inevitable result of a distribution 
which creates unproductive surplus out of income 
needed to raise the efficiency of wage-earners. 
For the rising consumption of the wage-earners, 
who form the vast majority of consumers, is 
necessary in order to take out of the industrial 
system the increasing quantity of consumables 
which its growing powers enable it to produce. 
That is to say, out of the surplus product in a 
progressive society only a limited quantity of 
income can advantageously be put into new 
capital, the rest being needed to raise the general 
volume of consumption so as to furnish full 
employment for this new capital and the new 
labour-power which such a distribution will 
evoke. The chief waste attending the accumu- 
lation of unproductive surplus is that it causes 
an excess of the new capital to come into being, 
plant of various sorts being increased so fast 
that an attempt to work the industrial system 
thus overloaded soon brings about a glut, fol- 
lowed by a fall of prices and a stoppage of indus- 



116 THE SCIENCE OF WEALTH 

trial processes, which continues until the glut has 
been worked off, and trade reviving, the same 
vicious round of under-consumption, over-saving, 
over-production and consequent depression again 
recurs. 



CHAPTER VII 

WAGES 

Labour stands on so different a footing from 
the other factors of production in regard to the 
conditions of its sale that a separate law of wages 
has often been propounded. Such procedure, 
however, is quite unwarranted. For the price 
of labour is determined like the price of the other 
factors by considerations of cost and scarcity af- 
fecting the relation of the supply to the demand. 
(Supply means the quantity of anything offered 
for sale within a given time at the current price, 
or the rate at which anything is put upon the 
market. Demand means the quantity of any- 
thing bought within a given time at the current 
price, or the rate at which anji^hing is withdrawn 
by buyers.) But while there is no special law of 
wages, there are conditions peculiar to the sale of 
labour, which deserve a separate discussion. Un- 
like land and capital, labour cannot be detached 
from the person of its owner. When its pro- 
117 



118 THE SCIENCE OF WEALTH 

ductive power is used, this use requires the pres- 
ence of the owner on the spot, and commonly 
entails certain effects upon his liberty and life 
which are not easily or adequately counted in 
the cost. Risk to life or limb, incident upon em- 
ployment, seldom figures in the wages bargain, 
while dirt, disease or degrading character of work 
have little influence upon the rate of pay. The 
wage-earner can seldom, like the landlord or the 
capitalist, withhold the offer of his productive 
agent for a while so as to raise its price. For, in 
the first place, he has usually no other means of 
livelihood to keep him while he waits. Secondly, if 
he could wait, his waiting would not merely waste 
his labour in the interval, but, by the starvation 
and the idleness it entailed, would damage the 
efficiency of his labour afterwards. The em- 
ployer, the capitalist, the landlord, can wait, 
for they have a reserve on which to live, and 
though their waiting involves some present loss, 
they can usually recover it in the terms which 
they are able to exact when they once more apply 
their land or capital which has not suffered any 
wastage of productive efficiency from a temporary 
withdrawal. 

Most workers, in a word, must sell their labour 
continuously for whatever it will fetch. But the 
natural condition of the labour-market has an- 
other disadvantage for the sellers. Their labour 



WAGES 119 

is contained in a large number of little separate 
pieces: the capital is usually concentrated in 
large masses wielded by a few employers. The 
sellers of labour, then, are many, the buyers few. 
This is an obvious advantage to the buyers, whose 
competition with one another is likely to be less 
free and continuous. Though it is the object of 
trade-unionism by collective bargaining to turn 
the edge of this natural disadvantage, it can only 
succeed by maintaining a more complete solidarity 
of labour than that which the employers can 
achieve by their combination. Now employers, 
being fewer and better informed, can usually 
maintain a stronger organization than labour, 
with a far larger reserve in case of hostilities. 
Again, where labour is more successful, the con- 
ditions of its powerful combination usually involve 
so rigorous a guard on the trade entrances as to 
increase the difficulty of an equally effective 
combination for other sorts of labour. This 
brings us to the central defect in the capacity of 
labour as a claimant for the "surplus product." 
For the distribution of this surplus, as we saw, 
depends upon the scarcity of the respective fac- 
tors. Now land is attended by a natural scar- 
city, only to be overcome partially and with 
difficulty. Capital acquires a position of scarcity 
by organized contrivance. Ability has some 
natural and some contrived capacity. But labour 



1^0 THE SCIENCE OF WEALTH 

is naturally abundant and has shown no ade- 
quate power to establish and maintain scarcity of 
supply. 

A few rare local instances have occurred, in 
the building or carrying trade of some American 
city, or among the shearers or other season 
workers of some new low-populated country, 
where a combination of labour has for a brief 
time enjoyed the same advantages of shortage 
which the ground-landlords of every large city, 
the employers in every well-organized industry, 
enjoy all the time. But the normal continuous 
condition of labour in most countries is one of 
over-supply, in the sense that there is usually 
more labour offered than is bought. Labour is 
the only factor of which the supply generally and 
permanently exceeds the demand. Though re- 
straints upon the birth-rate and improved organi- 
zation of workers doubtless tend to diminish 
this over-supply, they have not got rid of it. 
And so long as any over-supply exists, its neces- 
sary effect, so far as free competition operates, 
is to drag down wages to that lower level which 
covers bare costs of maintenance, or such slightly 
higher level as law, public opinion, custom or 
humanity prescribes. For if there are thirteen 
men competing for twelve jobs, the struggle of 
each to escape being the excluded one will drive 
the price of labour to a minimum nearly as 



WAGES 121 

effectually as if there were twenty men competing 
instead of thirteen. We may, then, summarize 
the general conditions which distinguish the 
labour-market from the markets for the sale of 
other factors, by saying that labour is naturally 
more abundant than the other factors and is less 
capable of correcting its abundance by organized 
contrivance. 'K^ 

A clear understanding of the nature of the 
wage bargain compels us to look more closely 
to the relation of the individual worker to the 
labour-problem. In our general statement of 
the price of labour as a "cost " we assumed that 
the price could not be less than would suffice to 
keep the worker in his ordinary health and 
strength, and enable him to support a family 
sufficient to replace him when his working time 
was over. In a progressive industrial society, 
wages must be higher than this mere "wear and 
tear " pay, including a stimulus and maintenance 
of more labour-power for the growth of indus- 
try. If every family were of about the same size 
and were supported entirely by a single wage- 
earner, an intelligible theory of wages might be 
constructed on this basis. But neither of these 
conditions is fulfilled. Working-class families 
vary in size and in the number of their members 
who are earning wages. Now, from the stand- 
point both of the industrial system and of human- 



122 THE SCIENCE OF WEALTH 

ity, the subsistence or efficiency wage means the 
weekly income of the family. There is, however, 
nothing in the conditions of the single wage 
bargain to ensure this family subsistence. For 
what is sold in that bargain is a given quantity of 
productive power. The same price is given for a 
unit of this power, whether it is given out by a 
man who must support a wife and six children 
out of the price he gets, by a man who has only 
himself to keep, or by a man whose wife and 
children are all earning money. If the wage were 
a full maintenance for the first case, it would 
yield a surplus for the second, and a still larger 
surplus for the third family. If, on the other 
hand, it is only sufficient for the single worker, then 
the man supporting a family out of it is evidently 
"sweated" and unable to maintain his own and 
his family's efficiency. 

It is true that by process of bargaining there 
is some tendency to fix a wage sufficient to de- 
fray the ordinary, or average, expenses the 
worker has to meet. In most male employments, 
for instance, wages must lie somewhere above 
the amount needed to support a single man, for 
otherwise married men with families to keep 
would not work in those trades and the supply 
of labour would be deficient. So, in most metal 
or mining centres, wages for men are somewhat 
higher for the same level of skill than in textile 



WAGES ns 

towns where there is fuller and more remunera- 
tive employment for women and children. But 
though thus indirectly there is some tendency to 
make wages conform to the needs of family sub- 
sistence, the tendency is exceedingly defective. 
Whereas a vigorous young Lancashire operative 
may, while unmarried, earn a weekly wage that 
yields a surplus on his needs, when married with 
a young family to keep he often finds the same 
wage deficient for their proper maintenance, while 
afterwards, if he still keeps his earning power when 
they are old enough to get employment, he may 
once more find his wages adequate to meet his 
needs. This fact that maintenance of labor de- 
pends on the composite family wage, while the 
wage bargain regards merely the quantity of 
labour given out by the individual worker, is 
the greatest crux of the wages question. The 
typical wage bargain for the price of labour 
per piece or per hour, is doubly defective from 
the sound economic standpoint. It does not 
secure a weekly wage for the continuous sub- 
sistence of the individual worker, much less 
does it secure the whole or any fixed proportion 
of the family subsistence. Yet, from the stand- 
point of the industrial system, it is this last fact 
that is essential. 

Even where family needs have some indirect 
influence in fixing individual wages, ordinary 



124 THE SCIENCE OF WEALTH 

family conditions alone count. The wage-system 
cannot take into account the shoals of exceptional 
cases, where the family is larger than usual, where 
there is an invalid wife or sickly children, or 
where the death or disability of the chief wage- 
earner throws the entire support of the family 
upon the woman. 

This last consideration brings up the special 
features of the labour bargain in the case of 
women. Its most onerous effects fall more heavily 
on women than on men. For the fact that the 
male wage is based in part upon a loose principle 
that a man is the sole or chief support of a family, 
while a woman is not, exercises a depressing in- 
fluence on the price of female labour. In most 
works the earnings of a man would anyhow be 
greater, because of the larger amount of produc- 
tive power he can give out. But this assumption, 
that the man supports others while the woman 
does not, has operated to raise male wages 
to a higher level over female wages for similar 
work than would otherwise have happened. It 
has helped to make the customary wage of men 
about twice that of women, instead of, perhaps, 
one-third more. 

The assumption, otherwise expressed, is that 
every woman is partially supported by some man. 
The depressing effect of this assumption is such 
that the ordinary wage for able-bodied efficient 



WAGES 125 

women-workers in most skilled and unskilled trades 
is below the level of separate maintenance. It is 
not a question of some low-skilled, irregular, 
home industry like matchbox-making or shirt- 
making. The ordinary woman's wage regarded 
as the sole source of her income is a sweating wage. 
The 10s, or 12s. ^ the usual factory wage outside 
Lancashire, is not enough to keep a woman living 
by herself in full efficiency and to enable her to 
provide against ordinary emergencies. Far more 
cruel is the effect of the wage-system on the large 
number of women who have to keep not merely 
themselves but a family out of their earnings, for 
they feel the full brunt of a system of bargaining 
which may drive the piece-wage or the weekly- 
wage of the individual worker indefinitely below 
subsistence point. Though this is no place for 
discussing remedies for industrial diseases, it 
may be pointed out that the mere insistence, 
either by legal or co-operative action, that women 
shall be paid at the same rate for the same work 
as men, would not, by itself, be likely to do very 
much to raise the industrial status or the wages of 
women. For, in the first place, there are not 
many occupations in which women are doing 
identical work with men. Again, where they are 
doing the same or nearly the same work, they 
usually hold that employment on the condition 
of taking lower wages, and if, by legal or trade- 



126 THE SCIENCE OF WEALTH 

union pressure, they insisted upon equal pay with 
men, they would be driven from the trade. Finally, 
if we are regarding wages from the social-economic 
standpoint as maintenance, since most women 
have not to contribute so much as men to the 
family maintenance, it is not so obviously just 
and desirable, as it sometimes seems, that they 
should be paid as highly as men even for the 
same work. Looking at labour as a mere com- 
modity it seems equitable that the same price 
for it should be paid to female sellers as to male. 
But, looking at it as a means of support for a 
working family, it is more important that the 
chief wage-earner should be highly paid than that 
the same rate should be paid to the subsidiary 
wage-earner. Only in as far as the growing eco- 
nomic activity of women tends to make her as im- 
portant a factor in the earning of the family in- 
come as the man, is it obviously desirable that 
the same rate of pay should prevail. This condi- 
tional defence of the higher rate for men, however, 
does not dispose of the numerous cases where 
the woman, not the man, bears the whole or the 
chief burden of supporting the family. These 
numerous exceptions require exceptional treat- 
ment which, if the competitive wage-system is not 
competent to accord, should be a matter for public 
provision. The fact that women are physically 
debarred from many highly-paid employments. 



WAGES 127 

and that the chronic over-supply of the labour in 
those open to them forces them to underbid men 
and one another for wage-work, cannot be 
adequately met by a policy of equal pay 
for equal work, and unless a public provision 
for unemployed women formed a foundation 
for co-operative action among wage-earners, 
the enforcement of this general maxim of equal- 
ity might seriously worsen women's economic 
condition. 

This will suffice to show that, whereas the con- 
ditions for the sale of the use of land and capital 
must always be such as to make provision for full 
maintenance of these factors, the conditions of the 
labour bargain do not necessarily secure the sub- 
sistence of the single worker or the working-class 
family. If individual bargaining were general, 
and the economic forces above described had 
unrestricted sway, the condition of the wage- 
earners as a body would be much worse than it 
actually is. There are, however, counter-forces 
to be taken into account. The most important 
of these is the intelligent self-interest of the em- 
ployer. In many trades it would not really pay 
the employer to buy all his labour at the cheap- 
est rate at which he could get men to work. For 
certain qualities of personal efficiency, affecting 
the quality of skill, intelligence, responsibility, 
etc., could not be got from "sweated " labour. 



128 THE SCIENCE OF WEALTH 

The good-will of the workers also enables a busi- 
ness to be run more smoothly and with less super- 
vision. The recognition of these obvious facts 
has caused a policy, which was always applied to 
salaried officials, in public or in private business, 
to be extended in many cases to the better grades 
of wage-earners. This policy is sometimes called 
"the economy of high wages," and is based on 
the truth that if you pay a man a higher rate, you 
will get more or better work out of him. For he 
will be able to give out more labour-power by 
reason of the higher standard of physical and in- 
tellectual comfort his wages allow him to support, 
and he will be willing to do so, because he will 
recognize himself as having a personal stake in 
the success of the business. Sometimes this 
extra- wage is given by some "bonus " or 
"profit-sharing" method. But it always tends 
to raise the family-wage above the point of 
bare subsistence and to stimulate increased effi- 
ciency of labor. 

Some have laid so much stress on this policy 
as to suggest that if employers could all be got 
to recognize its full validity, high wages and 
short hours would generally prevail, and all 
conflicts between capital and labour would dis- 
appear. But this is a view that ignores important 
qualifications of the policy. For there are many 
cases where "sweating " is a more profitable 



WAGES 129 

present policy for the employer than high wages. 
In most of the domestic workshops and other 
low-organized businesses where women or "green" 
male hands are employed, it would not be profit- 
able to pay anything but sweating wages. Even 
under the factory system and in many offices and 
retail stores, there are large numbers of workers 
on starvation or bare subsistence wages who 
would not respond to higher wages in a propor- 
tionate amount of increased productivity. It is 
foolish to pretend that sweating is always an 
unenlightened policy from the profit-making 
standpoint. So long as there stands a plentiful 
supply of idle hands, ready to take the place of 
the labour exhausted or used up, it is often 
"good business " to pay the lowest market price 
for low-skilled labour. Again, where there is 
some disposition among better employers to pay 
a higher wage which would come home later on 
in increased efficiency, the competition of greedier 
or shorter-sighted rivals often prevents its appli- 
cation. 

While, then, it is indisputable that this factor 
has played an important part in raising the 
standard of wages and of comfort in the skilled 
artisan classes, it cannot be relied upon to secure 
for labour in general an adequate wage of pro- 
gressive efficiency. Perhaps its chief effect has 
been to co-operate with the forces of public opin- 



130 THE SCIENCE OF WEALTH 

ion, trade-union action and industrial legisla- 
tion so as to help to build up and maintain 
a number of different levels of working-class 
comfort, roughly corresponding to the skill 
and intelligence involved in the various staple 
trades. 

It is important to recognize the causes and 
supports of these higher grades of wages and of 
the standards of living which depend on them. 
Some sorts of labour are more arduous, more disa- 
greeable, more degrading, more dangerous than 
others, and it might seem natural that these dis- 
advantages must be offset by a higher rate of pay. 
But this is seldom the case. For unless these dis- 
advantages are of such character as positively 
to exclude the ordinary worker from competing 
for the employment, they do not apparently 
raise the wage-level. Most heavy, dirty, repul- 
sive,^ unhealthy labour is paid for at the lowest 
rates, because the over-supply of low-skilled 
workers of average capacity is such that they 
cannot afford to take these conditions into consid- 
eration. Only when some unusually high standard 
of physique is necessary, as in the case of certain 
stevedores and foundry workers, does the ardu- 
ous nature of the work tell upon the rate of wages. 
Danger or degradation hardly counts until it 
reaches the limit of the steeplejack or the hang- 
man. This statement, however, requires one 



WAGES 131 

qualification. Though heavy, disagreeable, or 
dirty work seldom gets paid at a much higher 
rate, light, easy and genteel conditions, on the 
other hand, especially for women, depress wages 
below the ordinary. This partly explains the 
low pay of ordinary clerks and shop-assistants. 
The only large employment in which personal 
feelings much affect wages is domestic service, 
where servility and loss of independence are 
compensated by relatively high pay. Trades in- 
volving sldll, intelligence and responsibility, gen- 
erally have higher levels of wages. To some 
extent this is doubtless due to the consideration 
already adduced, viz., that a certain level of com- 
fort and security conduces to the efficiency of 
these sorts of labour. But a more important cause 
is the relative scarcity of numbers of workers 
qualified to do such work. When the working 
classes had little access to ordinary schooling, the 
wages of clerical skill were relatively high; free 
popular education has pulled them down, not 
because less skill and knowledge are needed for a 
modern clerk, but because a larger proportion of 
young men and women are able to attain these 
qualifications. In a word, skill, intelligence and 
other personal qualities, like the positive disa- 
greeabilities attaching to various kinds of work, 
can only raise the wage-level in one of two ways, 
either by requiring a higher standard of subsist- 



132 THE SCIENCE OF WEALTH 

ence for the physical or mental energy to be given 
out, or by restricting the number of qualified 
applicants in the labour-market. 

A main purpose of trade-unionism has been 
to assist these two tendencies. By helping to 
maintain higher levels of class comfort for the 
grades of skilled workers, and by resisting the 
downward pressure exercised by bad or unen- 
lightened employers, or by organizations of em- 
ployers in bad times of trade, they have assisted 
to maintain the labour conditions essential for in- 
dustrial progress. The particular restrictions 
upon entrance into a trade, upon output and the 
use of machinery, have all been directed to main- 
tain a relative scarcity of labour in the trade, with- 
out which collective bargaining would be ineffec- 
tive. Parts of this policy have been shortsighted 
and mistaken, as regards the immediate interests 
of the workers concerned, especially the resistance 
to labour-saving machines in trades, where, as in 
printing, cheapening of production would quickly 
stimulate demand so largely as to enhance the 
aggregate employment in the trade. But even 
here the circumstances of each trade must be 
taken into account. While labour-saving ma- 
chines and other economies tend, in the long run 
and as regards the general body of the workers, 
to raise wages without diminishing employment, 
the method of their introduction under the spur 



WAGES 133 

of competitive profit-seeking is often truly detri- 
mental to special bodies of workers immediately 
affected; and though the "long run" may bring 
compensations, the narrow margin of their lives 
and means compel them to safeguard as far as 
possible the "short run." Nor is the resistance of 
organized wage-earners to rapid changes of 
method justifiable merely from the standpoint of 
their immediate group-interests. It is justifiable 
also from the wider social-economic standpoint, 
provided the resistance is gradually relaxed. 
For the swift wholesale changes which competi- 
tive profit-seeking often prompts, are fraught with 
wider social and industrial dangers. So far as 
trade-union opposition only moderates the pace 
of these industrial changes, it not merely serves 
its own interests, but incidentally the social 
interest. 

Industrial laws, regulating the hours of labour 
and other conditions in different trades to various 
extents, assist in making the scarcity and the 
organization of labour more effective in some 
trades than in others, and so in raising and main- 
taining the different levels of standard wages 
which we find. If there had been no factory laws, 
no Acts protecting the lives of workers, or dis- 
criminating age or sex for purposes of employment, 
the incentives which evoked those improve- 
ments of machinery and methods that demand 



134 THE SCIENCE OF WEALTH 

higher quahties of skill and morale in factory 
workers, would have been far weaker than they 
have been, and the opportunities, of which 
the higher grades of specialized labour have 
availed themselves for organization, would not 
have existed. 

Thus we see how a combination of technical 
conditions, legislation and organization, has 
removed labour from a common low level, dis- 
posing it in a series of graded terraces, with rising 
standards of wages, and of comfort. No modern 
treatment of the wages question can take labour 
as a single market amenable to some one "iron 
law" or other simple formula. 

There are many sorts of labour, each with its 
own market and its own price, just as we saw 
there were many markets for the use of land and 
capital. Though the young raw labourer has 
some choice of occupation, for most workers this 
choice is very restricted both as regards trade and 
locality. The lower grades, requiring low skill 
and training, are more accessible to one another, 
so that we may speak of "labourers" in towns as 
if they formed a single market and had a single 
price, which indeed is substantially the case. 
The same is true of women's factory work in all 
but the most highly skilled trades. The degree of 
skill wanted can be acquired so readily by most 
young women that in effect a single market and a 



WAGES 135 

single price exists. The higher the skill or quality 
of the labour, the smaller the proportion of the 
ripening wage-earners able to qualify and enter 
this labour-market, and the more inaccessible it 
is to workers hitherto engaged in other sorts of 
work. So, for skilled male labour there exists a 
number of very distinct labour-markets, pro- 
tected against rushes from outside, and so less 
likely to be hampered by a large permanent ex- 
cess of supply. Wage-earners in this condition, 
being more intelligent and better paid, are enabled 
to organize themselves for bargaining far more 
effectively than wage-earners in the lower grades. 
So they are able to raise the level of their wages 
to a larger extent than the mere superiority of 
skill would appear to warrant. Because a com- 
positor may on the average earn a wage twice as 
high as a cotton or woollen weaver, one is not 
entitled to assume that the work he does is twice 
as skilful. What mainly determines the wage- 
level is the plenty or scarcity of the supply of 
available labour in the trade, not the degree of 
skill required, except so far as the latter condition 
affects the former. As in the use of land and capi- 
tal, scarcity of supply is the direct determinant 
of the price of the various sorts of labour. As in 
the case of capital, so in that of labour, it is the 
chief object of organization to procure and main- 
tain scarcity by making it difficult for outside 



136 THE SCIENCE OF WEALTH 

labour easily to enter the trade, and by re- 
straining full freedom of competition inside the 
trade. 

The establishment of a number of wage- 
levels for different trades does not, of course, 
signify that all the workers in the same trade 
tend to earn the same amount of money in a 
week or in a year. As more productive land or 
capital gets higher rent or interest than less pro- 
ductive in the same employment, so it is usually 
the case with labour. Where piece-wages prevail, 
this is, of course, obvious. A quicker or a better 
worker will take in a day or a week a larger sum, 
representing the larger size of his output or the 
smaller deduction for faulty work. Since a quicker 
or better worker gets more out of a machine, he 
will also often get in addition to the wage a bonus 
which merely measures the greater quantity of 
piece-work done. These differences of individual 
earnings, will vary very greatly in accordance 
with the conditions of the work. Where the 
machine closely sets the pace, and only those are 
employed who are competent to follow machines 
well speeded up, the individual differences of 
earnings will not be large. But where pace is 
largely or entirely a matter of individual deftness 
or nervous energy, one worker at the same piece- 
rate will often earn twice the money that another 
earns. 



WAGES 137 

These individual differences of earnings cor- 
respond to the difference of rent which 
follows the differences of fertility in acres of 
land, or the differences of interest which fol- 
low different hundred pounds of capital well or 
ill invested. 

In every industry at any given time there 
is some labour, as there is some land and capital, 
which is only just worth while employing at the 
market price. This labour, land or capital, is said 
to be "on the margin " of employment. When 
wheat prices in England fell below 305. per quar- 
ter some years ago, large tracts of poorer wheat 
land in Essex and elsewhere went out of cultivation 
to be brought under the plough again when wheat 
prices rose, as it became once more worth while 
buying these acres back from pasture. So in many 
manufactories there are machines which, being 
somewhat out of date, are not worked in ordinary 
times. But when a pressure of orders comes and 
good prices prevail, it pays to bring these once 
more into operation. Most labour markets con- 
tain, though they do not maintain, a similar 
reserve of labour, somewhat inferior to the 
average labour employed in ordinary times, 
but brought into temporary use in periods of 
booming trade. 

For every industry that is not a close monopoly 
more land, labour and capital is usually available 



138 THE SCIENCE OF WEALTH 

than is in actual use. That is to say, there exist 
portions of the factors which He below the present 
margin of employment. This does not necessarily 
mean that they are not employed at all. They 
may be employed in some other industry. Acres 
of land not good enough for growing wheat at 
present wheat prices may be used for grazing 
cattle; workers not good enough for getting coal 
may be employed in agricultural labour. But if 
the price of wheat makes it worth while, some of 
this pasture land will be brought into arable use; 
if the price of coal impels the opening of more 
pits, some rural labour will be drafted into coal- 
mining. 

For the higher price of wheat or coal will 
make it worth while to use land or labor less 
productive than the worst formerly in use, and 
to pay a price high enough to bring in the neces- 
sary quantity from some other employment if there 
is not enough lying unemployed. 

So we must recognize that for every industry 
employing land, capital and labour of different 
grades or qualities, there exists a supply of all 
these factors, either lying idle or put to some 
other use, which is not good enough at the 
present price that must be paid to get them, 
but which will be brought into the industry if 
a rise of prices of the product of the industry 
makes it profitable to employ them. The mar- 



WAGES 139 

ginal land, labour or capital in any trade will 
thus shift with the more or less remunerative 
condition of the trade. 

This moving up and down of "margins " in the 
factors of production is the actual process by 
which each trade feeds itself with the increased 
quantity of labour, or capital, or land it needs for 
its growth. Of course some of the new land or 
capital thus brought in may, after it has been 
acquired, prove to be as productive as that in for- 
mer use. The fact that formerly it was below the 
margin, in the sense of not being worth using at the 
price, often means that some preliminary barrier 
has been overcome. For some land below the 
margin is more fertile than some land in use, but 
it costs a good deal to clear and prepare it. Some 
agricultural labour may make excellent mining 
labour but will take time and training. So it 
appears that trades and businesses compete with 
one another not only for the increased factors 
of production but for those in use. This compe- 
tition, in fact, is the usual way in which the indus- 
trial system tries to put the proper quantity of 
land, capital, labour and ability in the places 
where each can be most profitably employed. So 
far as profitable employment corresponds with 
productive employment, and only to that extent, 
this competitive ordering of the factors secures 
the maximum production of wealth. This leads 



140 THE SCIENCE OF WEALTH 

to a consideration of the part played by the 
business man, the person directly responsible for 
ordering the factors of production for the attain- 
ment of profit. 



CHAPTER VIII 

PROFITS 

The business man directly engaged in organ- 
izing the processes of industry is sometimes 
described as the capitahst-employer, because 
he owns or controls the capital and hires the 
labour in a business. But it is not as owner of 
capital that he here concerns us. For, though 
the controller of a modern business may own 
the whole or part of the capital, such possession 
is not essential to him as business man. Indeed 
in the big organized joint-stock businesses the 
detailed control or management is often in the 
hands of men who own little or none of the 
capital. 

The typical business man hires his capital as 
he hires his labour, paying the current rate of 
interest for it. His practice is to buy the use 
of the labour, capital and land he wants at the 
lowest market prices, organize their co-operation 
in some productive process, and sell the products 
at a price which leaves a margin after defraying 
his expenses of production. This margin repre- 
sents his payment for his business ability. It 
141 



142 THE SCIENCE OF WEALTH 

is usually termed his "profit," and we shall re- 
serve this word to describe the payment for the 
ability or energy which he and other business 
men apply. But one may as well admit that 
popular usage has given such loose and shifty 
meanings to the word as to make its use in a 
scientific work very difficult. It is liable, in 
the first place, to be confused with interest, for 
where a business man owns his own capital he 
is apt to include the interest on that capital in 
his net profit. Indeed, in the book-keeping of 
a private business there is usually no attempt 
to distinguish the two. Or profit may also in- 
clude a payment for the risks to which the capital 
is exposed, though that should properly be ac- 
counted for as insurance cost. Moreover, man- 
agerial salaries, directors' fees and bonuses, 
form part of the true net profit though not 
usually included in it. Finally, a good deal of 
profit goes to enhance dividends in enterprises 
where the terms on which the capital was raised 
are such as enable the shareholders to benefit 
by the skilled management or good fortune of 
the undertaking. 

But after due allowance is made for these 
irregularities of use, it will be convenient to 
regard the business men who organize and con- 
trol the industrial processes as taking in the 
form of net profits the margin that remains 



PROFITS 143 

after all expenses are defrayed. A great variety 
of energy and ability goes into the work of this 
business man. He is responsible for planning 
the size and structure of the business, deciding 
what plant is to be used, what processes em- 
ployed, and how much labour of different sorts. 
He next must hire the requisite capital and 
labour, organize its co-operation for the pro- 
cesses of production, and buy the proper sorts 
of materials on favourable terms: the final 
product he must market advantageously. These 
processes of buying and selling, of technical 
business organization, the control of labour, 
and the book-keeping and finance, require a 
combination of sagacity, knowledge, enterprise, 
industry and self-command, the virtues of the 
good business man. Where large quantities of 
other people's money are involved, honesty and 
a high sense of responsibility are important in- 
gredients of the business character. Much of 
this work only demands, however, a sort of 
ability v/hich is tolerably plentiful in any civilized 
country where ordinary means of education are 
widely available. So a manager of a mill in a 
staple trade can usually be selected from an 
ample supply of qualified applicants at a salary 
not greatly exceeding the wages of foremen or 
skilled artisans in the best-paid processes of 
manual labour. 



144 THE SCIENCE OF WEALTH 

Although this ordinary work of management 
involves many acts of judgment which contri- 
bute to the success or failure of the business, 
it may be regarded as tolerably routine in char- 
acter, and as distinct from the critical plans and 
judgments formed by the man responsible for 
the general direction of the business. 

This business man is thus a link between the 
producer (or owner of a productive agent) and 
the consumer. His work consists in arranging 
and conducting the most economical co-operation 
of various sorts of capital and labour, and his 
pay, or profit, consists of the difference between 
the expenses of buying the factors of production 
and the price he can get for the product. At 
first sight it may appear as if he were merely 
a mercantile middleman, buying something cheap 
and selling it dear. But even among commer- 
cial business men there are few whose profitable 
operations merely amount to this. For the 
merchant organizes distribution, gathering his 
various goods from different sources, selecting 
and arranging them, and placing them at the 
disposal of retailers in greater quantities and 
ampler choice than would be possible if each 
retailer had himself to seek producers of each 
article he needed to stock his shop. The middle- 
man who thrusts himself needlessly and officiously 
between two classes of producer, or between pro- 



PROFITS 145 

ducer and consumer, is the exception, not the 
rule, though it is true that many middlemen 
consume their energy more in competition with 
one another than in the proper part which be- 
longs to them, the organization of markets. 

But the head of a manufacturing firm, the 
manager of a railway or of a mine, performs a 
more obviously productive operation. The sepa- 
rate bits of capital and labour that he buys only 
attain their full productive power when they 
are brought together. The whole is more pro- 
ductive than the mere sum of the productive 
value of the parts. A worker, say a carpenter 
or shoemaker, can produce very Httle by him- 
self, or with such tools, material and market as 
he can himseK command: only when he is brought 
into a fully equipped business, with all the ad- 
vantages of division of labour and specialized 
capital, are his energy and skill fully productive. 

If, then, a business man can buy his labour 
at a price which represents its small produc- 
tivity as a single unit, and sell the greatly en- 
larged product which comes from using it with 
other units of labour and of capital, he will 
appear to make an immense gain in actual wealth 
which he can take for his profit. 

This indeed is what he tries to do, and, as we 
saw, there is a socialistic theory which virtually 
explains all "surplus" as consisting in this sort 



146 THE SCIENCE OF WEALTH 

of gain. But there are several considerations 
which prevent the full acceptance of this ex- 
planation of "surplus." In the first place, the 
business man does the same thing with the 
capital he uses in his business. A typical modern 
business requires him to collect from many 
different little men of capital, investors, a number 
of bits of capital. Each of these by itself is much 
less productive than when he has organized it 
into his business structure. Here, too, he seems 
to buy it at a price measuring its smaller sepa- 
rate productivity, to make it more productive 
by combination, and to keep to himself the whole 
gain, or profit, of the proceeding. 

Thus there seems to be a surplus value got 
out of capital corresponding to that got by 
buying labour cheap. And it is quite true that 
profit may be taken to consist of the difference 
between the smaller productivity of labour 
and capital used in other ways and the larger 
productivity when appHed to the organized 
business in question. 

If a business man could really get and keep 
for himself as profit all the difference between 
what a worker, or £100 of capital, could produce 
"by itself" and what he or it could produce as 
a factor of an organized business, profits would 
swallow up the whole of any industrial surplus 
that could be found. But no business man can 



PROFITS 147 

get all this. For he finds other business men 
bent upon the same object. This competition 
checks profit in two ways. The first business 
man who came among a population of small 
peasants and set them working in a factory or 
mine would get them at a wage slightly exceed- 
ing what they could earn each working for him- 
self upon the soil. The aggregate increase in 
the product of their labour would be great, and 
he would be able to keep nearly all of it as profit. 
The early "clothiers" and other factory owners 
did in fact get this advantage when they ex- 
ploited a locality hitherto untouched by the new 
industry. But, as other business men came 
into the same field, their surplus-profit was liable 
to be cut into at both ends. For our clothier 
could no longer always buy labour at a price just 
above the agricultural earnings, but found him- 
self bidding against other business men trying 
to do the same thing. In order to get the labour 
he wanted he was obliged to pay a wage slightly 
exceeding, not the agricultural earnings, but the 
wage it was worth while another factory owner 
to offer to the peasant. In other words, when 
his available supply of raw labour was limited 
and a good many business men were beginning 
to exploit it, its price would rise so as to cause 
a rise in the cost of working the factory or 
mine. 



148 THE SCIENCE OF WEALTH 

And what applies to labour would in some 
measure apply also to capital and land. The 
first-comer among the business men would evi- 
dently get the land for building a factory, or 
for working minerals, on easier terms than after- 
wards, when other business firms were compet- 
ing for the best sites or the likeliest seams. So 
competition among business men in buying the 
factors of production will keep down profits by 
raising expenses. The same cause will cut down 
profits at the other end, by reducing the price 
at which the product of the factory or mine is 
marketed. The first-comer here again has the 
pull. For he not only buys his labour and other 
factors cheap, but he can sell his product dear, 
so long as he remains alone in the field. But as 
the competition of other business men becomes 
effective in the market for his products, as well 
as in the labour market, he finds his handsome 
profit, i. e. the difference between the low price 
of the factors and the high price of his product, 
cut down simultaneously at both ends. If the 
competition becomes not merely effective but 
intense, his profit may be reduced to a bare 
minimum. 

Thus, as a matter of mere theory, the busi- 
ness man, as the owner of a factor of produc- 
tion, viz., business ability, appears to be in the 
same position as the owner of any of the other 



PROFITS 149 

factors. Scarcity or monopoly may yield him 
a large surplus of unearned income, abundance 
or competition may reduce his "profit" to a 
minimum just sufficing to evoke the use of his 
business ability. 

In practice profits vary so much more than 
wages, or interest or salaries, for the same sort 
of organizing work in the same trades, that it 
seems as if no general statement could be applied 
to them. In certain trades some well-equipped 
businesses will be taking very high rates of 
profit, others very low. The difference is com- 
monly put down to the ability of direction and 
management. Where two manufacturing busi- 
nesses, two large hotels, two retail general stores, 
are worked with adequate capital under the same 
external conditions, and one succeeds while the 
other fails, it seems evident that either luck or 
skill of management must explain the difference. 
Though luck plays a larger part in the business 
world than is sometimes supposed, management 
is commonly accounted the efficient cause. 
And this is doubtless a true view. But to jump 
from this view to the theory that the creative 
power of business ability has brought into being 
a great fund of wealth which belongs to the busi- 
ness man, as the necessary reward of his superior 
mental energy and skill, fails to take into account 
the full conditions of such business success. 



150 THE SCIENCE OF WEALTH 

Take an illustration most favourable to this 
superstitious view of human ability, the case of 
two equally well-situated hotels or shops, one 
of which gets high profits while the other only 
just pays its way. Ability of management un- 
doubtedly has a great deal to do with the differ- 
ence of result. This abihty will operate in two 
directions. The successful business will be better 
organized, i. e. the capital and labour will be 
better chosen and better directed. But a little 
reflection enables one to see that, though the 
initiative in this better organization may proceed 
from the abihty of the single manager, its efla- 
cacy depends upon the capacity of all the various 
employees for co-operating to carry out the 
manager's directions. In other words, there is 
a sort of ability which oozes from the whole or- 
ganized personnel of the business to help towards 
success. This cannot be ignored, it is not merely 
a condition but a joint-agent in the success. 
Every just-minded manager of a successful busi- 
ness recognizes that a large share of his success 
is due to the co-operation of his subordinates or 
employees. Again, much of the success of the 
hotel or shop will be due to the fact that it has 
gathered a special clientele who think they can 
buy there some quality of article or some com- 
fort or accommodation which they cannot get 
elsewhere. This superiority is often very slight. 



phofits 151 

often indeed a mere matter of form or fashion, 
resting on no substantial basis of merit, but it 
serves to lift a business out of the ruck of com- 
petition, and secure it a control of the market. 

The whole profit of a successful business, be- 
yond what is really minimum wages of ability, 
is a scarcity rent or surplus, attributable, like 
every other surplus, to a restraint upon free 
competition by limiting the supply of the factor 
of production that receives the surplus. The 
conduct of modern industry lends itself to this 
scarcity. For, though there is most likely a 
plentiful natural supply of efficient business 
ability of various orders, only a small propor- 
tion of its owners can find an opportunity of 
training and applying it. Many men of natural 
ability cannot get it recognized, or cannot get 
the confidence of men with capital needed for 
their gift to fructify, or they cannot find or make 
a good business opportunity for employing it. 
There may be thousands of men fitted by nature 
to be heads of a great shipping firm or of a bank- 
ing company, but the number of men required 
for such posts is counted by tens. The small 
number of effective competing firms in many 
of the highly-developed enterprises means that 
many of the profitable orders or contracts are 
not really made the subject of close bargaining. 
They pass to one or other of the firms that has 



152 THE SCIENCE OF WEALTH 

acquired a special reputation for "that class of 
business," or else the competition of the few 
firms competent to undertake the work is quali- 
fied by combination or arrangement. So a very 
large quantity of work is done on terms yield- 
ing a rate of profit far in excess of what would 
have been got if such competition operated as 
prevails between rival grocers in the same street. 

The same paucity of the number of close- 
competing firms, of course, not only raises sell- 
ing prices but lowers the price of labour and of 
free capital. For it is evident that labour can 
get better terms, if there exists a number of 
keenly competing firms bidding for the best 
supply, than if there are only half-a-dozen whose 
profitable state stimulates them to organize a 
strong employers' association. A general survey 
of the industrial world would perhaps distin- 
guish the trades where close competition is 
maintained between considerable numbers of 
standardized routine businesses from those where 
each business does a more or less separate class 
of work and has a market that is to some extent 
its own. Both may belong to gi-eat capitalist 
enterprise, but the ordinary profits of the former 
will be low, while many businesses of the latter 
class will be able to make great profits even in 
the ordinary course of trade. 

It is probable that in advanced industrial 



PROFITS 153 

countries, such as Great Britain and the United 
States, a constantly increasing share of the 
"surplus" figures as net profits to the success- 
ful "business man." This statement is prob- 
ably correct, even if full allowance is made for 
losses of unsuccessful "business men." Of the 
aggregate "surplus" which we term "unproduc- 
tive** because it exceeds the necessary induce- 
ment to apply a factor of production, business 
ability takes a considerably larger share than 
land or capital. 

The justification of this statement would in- 
volve a more minute examination than is here 
possible, and it would be necessary to include 
under profits a good deal that is concealed under 
interest and rent. But it is supported by a 
general appeal to experience. Most of the fami- 
lies of evidently growing wealth have made their 
wealth out of "trade." By this is meant that 
profits, rather than rent or interest, constitutes 
the origin and substance of their wealth. Part 
of this wealth may reasonably be regarded as 
the costs of ability, the remuneration necessary 
to evoke and encourage the larger quantity and 
variety of business skill which modern industry 
requires. But a large part will rank with eco- 
nomic rent of land and surplus interest as "un- 
productive surplus." The general trend of 
modern industrial development has been to 



154 THE SCIENCE OF WEALTH 

assign more importance, more power and more 
wealth, to the employing and directing class. 
"Capitalists,'* as such, though increasing in 
numbers and in the amount of capital they own, 
are of relatively less importance. They have 
become investors, and though they take in in- 
terest a large share of the whole product, their 
control even of the use of the capital they own 
is diminishing and passing more and more into 
the hands of directors and employers. 

But an understanding of the modern system 
would be very imperfect if it did not include a 
special consideration of one particular species 
of "business men," viz., those concerned with 
the general organization of industry by means 
of finance. For as the ordinary little capitalist 
is in effect controlled by the managers of the 
business he has put his money in, so the latter 
are in an increasing measure the dependents and 
agents of great financial houses. 

The business man, as such, is not an inventor 
of new processes. The ability of a Stevenson, 
an Edison, a Siemens, belongs to a different 
order. Only when it has been acquired and 
taken over by a business man does it rank as 
industrial power. Of course some inventors are 
also business men and so are able to exploit 
industrially their genius. But these are rare 
exceptions. The ability of the business man 



PROFITS 155 

requires, not that he should invent, but that he 
should have a true eye for the business value of 
other people's inventions. This, in fact, should 
be considered as his first function in an age of 
progress. He is the man with an eye for profit- 
able notions, whether the notion be a new ma- 
chine, a new product, a new market, or a new 
business method. He will distinguish profitable 
from unprofitable notions, buy the former as 
cheaply as he can, make or adopt a business 
structure to embody his notion, and get his 
profit by conducting such a business or by sell- 
ing it to some other business man. Most of 
these notions are industrially productive as well 
as profitable. When a mechanical invention 
cheapens manufacture, or transport, or intro- 
duces a new comfort or convenience of life, 
utilizes a waste product, or opens up a new 
market, the inventor or series of inventors and 
the business man between them have been 
directly instrumental in causing an addition to 
the world's wealth. Other notions equally 
profitable to the business man may, however, 
carry little or no industrial productivity. An 
artful mode of advertising, a cheap parasitic 
imitation of an established article, a skilful 
method of company promotion, may be quite 
as profitable, though destitute of any produc- 
tivity. It may be just as profitable to get busi- 



156 THE SCIENCE OF WEALTH 

ness away from another firm as to establish a 
new business, and though upon the average this 
success in competition implies the substitution of 
a somewhat better or cheaper article, there are 
many cases where no such gain can be assumed. 

Where business ability is thus applied to the 
exploitation of a profitable notion, that ex- 
ploitation may be achieved in a single stroke or 
by a longer business process. The financial 
dealer in profitable notions promotes or recon- 
structs a company, sometimes taking out at once 
in cash, or in shares which he at once "unloads,'* 
as much as he can of the anticipated future 
profits of the working of the company. Some- 
times he retains a holding of shares, using them 
either to earn dividends or for profitable deal- 
ing on the Stock Exchange. The part played 
by this type of business man is of rapidly grow- 
ing importance in modern industry, and the 
proportion of the general wealth which passes 
to him as "profit" is increasing. 

In countries where joint-stock enterprise is 
most highly developed, as in Great Britain and 
America, it is probably the case that three- 
quarters of the fresh supply of capital goes into 
companies and pays heavy toll to the financial 
organizers. This profit, however, though often 
excessive, is by no means all unearned. For 
under our competitive system the financier is 



PROFITS 157 

an indispensable being, and upon the skilled 
performance of his will the economical working 
of the industrial system more and more depends. 
Though he is "out for profit," the work for 
which he is paid consists in the direction of the 
new supply of industrial energy to the places 
where it is wanted for the growth of the indus- 
trial system. For the money or paper values, 
with which financiers seem to be exclusively con- 
cerned, are the machinery by which not only 
real capital but labour and business ability are 
drawn to the industrial points where they can 
be productively applied. The floating of a 
bogus rubber company, by which investors are 
duped into entrusting their savings to financial 
sharpers who use them for their private pur- 
poses, is the exception not the rule. The proper 
work of the financier is to cause money-savings 
to take shape in steam engines and steel rails 
for a Canadian railway, dynamos for some 
electric-power company, spinning-frames and fac- 
tory buildings for a textile company, and to 
draw from the general supply of labour a suffi- 
cient number of the right sort of workers to co- 
operate with these various sorts of plant. 

Now that a larger and larger number of the 
staple trades are passing under jointstock en- 
terprise, while the apparatus for gathering and 
conveying capital and labour is becoming more 



158 THE SCIENCE OF WEALTH 

complex and more widespread, it follows that 
the work of financial direction grows more deli- 
cate and more important. Firms like J. P. 
Morgan's, Rothschild's, and the like, are en- 
gaged in directing the flow of immense streams 
of new industrial energy to various parts of the 
earth, for the making of roads, the discovery 
and development of mining and agricultural 
resources, and for the construction of various 
sorts of machinery and plant. Along with this 
productive work there goes a good deal of ob- 
structive or destructive work, some of which is 
equally profitable to financiers. But the diffi- 
culty of disentangling the socially useful from 
the useless or noxious operations must not lead 
us to question the great importance that attaches 
to finance as a genuinely productive agency. 
Under a different social-industrial system much 
of this work might be dispensed with or done 
otherwise, but, as matters actually stand, the 
work of the financier is of immense value and 
must like other work be paid what is necessary 
to get it done efficiently. 

This does not, however, imply that the profits 
taken by financiers are an accurate measure of 
the services they render or a minimum induce- 
ment to their rendering. On the contrary, there 
is no sort of work more likely to be overpaid. 
For the nature of these financial services fre- 



PROFITS 159 

quently excludes effective competition. The 
floating of loans or the financing of big compa- 
nies can only be undertaken by a few great 
houses or groups, and the conditions of close 
bargaining, so as to drive the profits to a mini- 
mum, seldom exist. There is no market price 
for such work: it is a matter of special opportu- 
nities and special terms. The secrecy or semi- 
secrecy which enshrouds many of these financial 
operations also favours excessive payment. There 
can, therefore, be no question but that the profits 
of this class of business contain a larger pro- 
portion of unearned or unnecessary income than 
any other sort of profit. 

It will be convenient here to present a sum- 
mary of the results of the inquiry, made in this 
and the three preceding chapters, into the re- 
spective claims made by land, labour, capital, 
and ability upon the industrial product, and into 
the methods of enforcing these claims. The 
common interest of all parties concerned re- 
quires that out of the product, or income, as it 
is produced, proper provision should be made 
for the maintenance of each factor needed to 
carry on the process of production. Where any- 
thing is taken out of the land in the way of fer- 
tihty of soil or other natural powers, it must, 
where possible, be restored: the land must not 



160 THE SCIENCE OF WEALTH 

be let down. Proper provision must be made 
for wear and damage to buildings, machinery 
and other instruments, and for the risk of hav- 
ing to replace them by better sorts of instru- 
ments. Along with these depreciation and in- 
surance funds for land and capital must be 
placed such part of the wages of labour and 
ability as goes to maintain the various sorts of 
productive human powers required to continue 
the work of production. A part of wages and 
salaries will thus be classed not with rent and 
interest but with "wear and tear" provision. 

These are all the payments necessary to secure 
the existence and continued operation of the 
industrial system as it stands. In a primitive 
industrial society they might exhaust the product, 
but under modern conditions the co-operation 
of the factors yields a product far in excess of 
what is needed for mere maintenance. This 
excess or "surplus" may be used to feed the 
growth of the industrial system by a properly 
apportioned distribution, or it may go as waste- 
ful overpayment to the owners of any factor 
strong enough to take it. A large part of the 
surplus does go in the shape of minimum interest 
and profit, and wages of progressive efficiency, 
to evoke larger and better supplies of the various 
sorts of capital, ability and labour, required in a 
progressive industrial society. The state, too. 



PROFITS 161 

requires and obtains similar allowances for main- 
tenance and growth, obtained by payments 
made out of the industrial product which the 
public services have assisted to produce. 

The whole of the industrial product, the 
general income, could advantageously be applied 
to these purposes of providing for the mainte- 
nance and proportionate growth of the factors 
of production. But it is evident that the whole 
of the surplus need not be, and in fact is not, so 
applied. Much of it is paid, not as provision for 
maintenance or growth, but in excess of what 
is necessary for these purposes. Going to land- 
owners as rent, to capitalists as excessive divi- 
dends, to business men as excessive profit, some- 
times to workers as excessive wages, it retards 
industrial progress. It takes portions of wealth 
which might have been applied to promote in- 
dustrial growth and pays them as "unearned 
income" to persons who thereby not merely are 
not induced to increase their output of personal 
energy but are enabled and induced to diminish 
or withhold such productive energy as they 
might otherwise have given out. For all un- 
productive surplus acts as an endowment of 
idleness. 

This "unproductive surplus," whether ob- 
tained by owners of land, capital, ability or 
labour, is obtained in the same way, viz., by 



162 THE SCIENCE OF WEALTH 

establishing a shortage in that factor and rack- 
renting the owners of the other factors. A 
natural or contrived monopoly or scarcity is 
the origin of every overpayment. It is mani- 
festly false to attribute to one of the factors the 
sole power to take this surplus. Neither the 
landlord, nor the employer, nor the capitalist, 
possesses this exclusive privilege. Sometimes 
one, sometimes the other, finds or makes his 
factor "scarce" and gets a "pull" proportionate 
to that scarcity. In thickly populated countries 
the landowner takes a large share of this unpro- 
ductive surplus in rising site-values and in agri- 
cultural and mining rents, except so far as easy 
and cheap access to large external supplies of 
foods and other materials qualifies his pull. In 
sheltered industries, where the possession of 
some natural or organized advantage gives cer- 
tain capitalists the power to keep out "free" 
capital and to restrain free competition, capital 
may take its "pull" in high dividends and busi- 
ness men in high profits. Since such shelter 
and the scarcity it brings are usually achieved 
by the genius, skill, industry or luck, of business 
men, the proportion of such industrial gains 
which rightly ranks as profit is probably much 
larger than that which ranks as interest. A con- 
junction of trade-unionism and favouring cir- 
cumstances occasionally gives a group of wage- 



PROFITS 163 

earners a short-lived pull, enabling them to 
secure some unproductive surplus in their wages. 
In every case this unearned and unproductive 
surplus is the result of a natural or contrived 
shortage of one factor of production in relation 
to the others whose co-operation is required for 
the production of some sort of wealth. 



CHAPTER IX 

EXCHANGE AND PRICES 

We are now in a position to understand why 
a ton of kitchen coals in London may be bought 
for the same sum as will buy a pair of medium 
quality blankets, a britannia metal teapot, half- 
a-dozen cotton shirts, or forty loaves of bread. If 
each of these purchases can be made for a sover- 
eign, it is because the various expenses of produc- 
tion, the payments to the owners of the different 
productive agents in the successive processes 
through which each of the articles has passed 
happen to add up to this same amount. In each 
case the sovereign contains a great number of 
little bits of price paid for the labour, ability, use 
of capital and land in the farming, mining, manu- 
facturing, transport, distributive businesses, re- 
quired to produce and put on to the market the 
ton of coals, the blankets, the teapot, shirts and 
loaves. If we traced each from its earliest stage 
and followed the raw materials as they moved 
164 J 



EXCHANGE AND PRICES 165 

through these processes, we should see the aggre- 
gate expenses mounting up until the retailer's 
profit completed the amount. At any of these 
stages we should find that the total expense of the 
productive process consisted of a variety of little 
expenses for the different sorts of labour, capital, 
land, ability required, some of these expenses 
bearing minimum or "free competition " costs, 
others being loaded with some "surplus " repre- 
senting the monopoly or scarcity of some one or 
other factor. The different articles selling for a 
sovereign will not by any means be composed of 
costs and surplus in the same proportions. It 
might be the case that the 20s. paid for a pair of 
blankets contained only 45. or 20 per cent, of 
surplus (little rent or surplus profits being in- 
volved), whereas the 205. paid for the loaves 
might be loaded with 85. or 40 per cent., the 
rent of wheat land, a corner of wheat, a mil- 
lers' or a bakers' combine, going to swell the 
final sum. It would require a special study of 
the history of each commodity to enable us to 
say how much of the final price the consumer 
had to pay for it was "cost" and how much 
"surplus," or again, taking the surplus, how 
much of it was productive, making for indus- 
trial growth, how much unproductive, i. e. waste- 
ful or detrimental. 

It has been sometimes held that "rents " and 



166 THE SCIENCE OF WEALTH 

other surplus do not enter into and increase the 
final price of commodities, that they are only 
extra payments which owners of particularly ad- 
vantageous land or capital can get. But our 
analysis, which identifies a "surplus " with a 
shortage and an enhanced price of the entire 
supply of some sort of land, capital, etc., required 
in a process of production, disposes of this objec- 
tion. For where there is a natural or contrived 
scarcity of any supply of productive power, the 
whole of that supply, whatever sort of standard 
measure is applied to it, rises in price. If hop- 
land is short in supply the price of hops will regis- 
ter that shortage. The fact that some acres of 
hop-land are better than others, and that the 
worst acres may get little more rent than they 
could get for growing wheat, does not affect the 
fact that the "scarcity " of hop-growing land raises 
hop prices. Of course what is called the " differ- 
ential *' rent, measuring the difference between 
the hop-growing power of a good and a bad acre, 
does not enter or affect the price. Why should it? 
The price, like every price, is paid for a given 
quantity of commodity or service. If one acre 
gives out twice as much of this productive ser- 
vice as another, of course it is paid twice as much 
in rent. This has nothing to do with the " surplus " 
or "scarcity" element that enters into the price of 
a unit of hop-growing power. 



EXCHANGE AND PRICES 167 

Or, if oil or steel rails fall under a combine 
or other business arrangement, limiting the num- 
ber of wells or mills allowed to work, and restrict- 
ing the market supply of oil or rails, this scarcity 
will raise the price of all the oil or all the rails, that 
produced by the worst wells or the most inefficient 
plant equally with that produced by the best wells 
or the most efficient plant. The real profits made 
by the worst wells or mills will, of course, be lower 
than those made by the best, but only because 
they give out a smaller quantity or a worse quality 
of output in a given time. 

All the sorts of surplus which we have traced, 
taken by landowners, capitalists, employers, etc., 
in any process, extractive, manufacturing, trans- 
port, commerical, professional, financial, go to 
enhance the final price of the commodities pur- 
chased by consumers. 

If there were absolutely "free competition" 
everywhere and equal abundance of all the fac- 
tors of production, all prices would stand equaUy 
at a minimum, and all goods and services would 
exchange according to the sum of their "costs." 
Our blankets, teapot, shirts, bread and coal, un- 
loaded of all their composite surplus, would, of 
course, no longer sell for a sovereign each, but at 
various lower levels. Some writers in Political 
Economy construct a theory which assumes this 
freedom of competition and this complete fluidity 



168 THE SCIENCE OF WEALTH 

to exist, and then make allowances for "friction" 
or exceptions. But this, as Ruskin pointed out, 
is like starting the study of human anatomy on 
the supposition that the body is absolutely elastic 
and afterwards making allowances for its actual 
inelasticity. Scarcity and combination are as 
real and as normal features of the actual 
situation of our industry as are competition and 
abundance. In fact it is impossible to give 
any intelligible account of the working of the 
system without a doctrine of shortages and 
surplusages. 

In our explanation of Markets and Ex- 
change a clear comprehension of this fact is 
essential. Goods and services exchange against 
one another in proportion to their expenses of 
production or loaded costs, not in proportion 
to the quantity of labour-time they contain, 
or any other measure of "natural" costs of pro- 
duction. 

The price, and therefore the expenses of pro- 
duction, of every portion of a supply of goods are 
the same. But the costs of each portion are not 
the same. The "costs" of growing a quarter of 
wheat are less in a fertile field than in an infertile 
one; the "costs " of producing 1,000 tons of steel 
are less in a well-equipped than in an ill-equipped 
works. Since "costs" plus surplus compose exr 
penses, this implies that the surplus element in 



EXCHANGE AND PRICES 169 

expenses and supply price varies, being biggest 
in the best type of business (farm, factory, mine, 
etc.), smallest in the worst. If one took account 
of all the farms growing wheat for a particular 
market, one might find a farm which it only just 
paid to put to wheat-growing. That means that, 
in the co-operation of land, labour, and capital 
which went to the raising of a quarter of wheat 
upon this farm, more productive power of labour 
and capital had to be bought to make up for the 
smaller quantity of land-power which was avail- 
able. The same expenses of wheat-growing per 
quarter were incurred in this farm as upon the 
better farms, but a larger proportion of the sum 
went as "costs" in paying capital and labour, 
a smaller proportion as "surplus" in paying 
land. 

Similarly in the case of steel rails. Here the 
worst plant in the industry corresponds with the 
poorest wheat-farm. A larger proportion of the 
price per ton for steel rails will go for wear and 
tear and maintenance of capital and labour in the 
worst estabhshments, "profits " standing at a 
minimum. In fact, the "expenses " of a ton, 
represented by its price, say SOs., will be virtually 
absorbed in these necessary costs, leaving no sur- 
plus interest for investors or profits for the entre- 
preneur. 

But if there are some farms contributing to 



170 THE SCIENCE OF WEALTH 

the supply of wheat which only just remunerate 
the capital and labour, leaving no surplus for rent, 
how can it be said that rent enters into price, en- 
hancing it? If some establishments contributing 
to the supply of steel rails only just pay their way 
and yield no surplus profits, how can it be said 
that there is any surplus element in the expenses 
and the price of steel rails? The answer is that 
the scarcity of good wheat-lands is the cause of 
the high average expense of raising a quarter of 
wheat, enabling landowners to charge a high price 
for the fertility of Nature and loading the "costs" 
of labour and capital with this surplus. The fact 
that some land used is so infertile that Nature 
contributes very little to the production of a 
quarter of wheat, labour and capital doing nearly 
all the work, does not affect the argument. If 
there had been plenty of fertile land available, 
the surplus (rent) would be very little, and the ex- 
pense and price per quarter would be so much 
lower. 

It is this scarcity of better land that brings 
worse land into use, by loading expenses of wheat 
raising and prices with so large a surplus that 
capital and labour can be employed remunera- 
tively upon some poor land. 

Similarly, the scarcity of well-equipped steel- 
mills causes the average expense of producing 
steel rails to be higher than it would be if there 



EXCHANGE AND PRICES 171 

were an abundance of such mills, and by the high 
prices resulting from this scarcity a few worse- 
equipped mills are enabled to survive and just 
pay their way. The well-equipped mills will sell 
rails at a high profit, the ill-equipped mills will 
only cover costs. But all the same, the surplus 
profit which the scarcity of best plant en- 
ables the well-equipped mills to earn is repre- 
sented in and is got out of the high expenses and 
price of rails; it is these prices, thus determined, 
that enable the few backward mills to keep on 
working. 

This argument means that supply prices are 
not determined, as has sometimes been contended, 
by the costs of production of the most costly 
portion of the supply, i. e. the wheat produced in 
the worst land, and the rails turned out by the 
worst-equipped mills. This "marginal " land, as 
it is called, and these "marginal " mills are made 
just worth working by the fact that the scarcity 
of better land and better plant has loaded the ex- 
penses and the supply price with a surplus measur- 
ing the degree of that scarcity. Discover a new 
large rich wheat country, most of this surplus 
or "rent" that has entered into expenses and 
raised prices of wheat will evaporate, and with the 
fall of prices the bad wheat-land will pass out of 
use. Set up a lot of new well-equipped steel 
plants, the scarcity value of the existing plants 



172 THE SCIENCE OF WEALTH 

will collapse, profits and prices will fall, and the 
ill-equipped or "marginal" mills will be driven 
out of use. 

Expenses of production and prices of supply- 
are not, then, determined by the worst or most 
costly businesses, but by the ordinary standard 
business. In most staple manufacturing in- 
dustries the vast bulk of the production is 
done by establishments of approximately equal 
equipment. Almost all the mills or factories in 
a trade will have up-to-date machinery and 
methods, and will tend towards a common size 
or pattern. 

In competitive trade, in order to hold its own, 
a business must enjoy the same advantages as its 
competitors in buying its materials, in working 
them up and in selling the product. So in each of 
the staple textile or metal industries there emerge 
from competition one or two types and sizes of 
business more effective and economical than any 
others, and, since all the new capital put into the 
trade runs into those shapes, they may be taken 
as representative firms. It is the expenses of pro- 
duction in these representative firms, which do 
the bulk of the trade, that determine the supply 
prices of the goods. There may be a few firms in 
the trade enjoying some special advantages or 
economies in the shape of patents or secret pro- 
cesses or management, and so able to produce a 



EXCHANGE AND PRICES 173 

little better or more cheaply than the representa- 
tive type. There may also be a few firms of 
backward or obsolete type, with old-fashioned 
machinery or methods, struggling for their life 
and doomed to early extinction, unless they can 
be reconstructed and brought up to date. But 
these few superior and inferior firms will not ap- 
preciably affect expenses and prices. The repre- 
sentative firms, producing, say, 90 per cent, or 
more of the total supply, will regulate the prices. 
Superior firms will thrive upon these prices, en- 
joying high profits : inferior firms will starve upon 
them. When it is said that yarn or cotton cloth 
of a particular quality costs so much to produce, 
or that steel rails, roller desks, wine-bottles, etc., 
can be turned out at such and such a price, it im- 
plies a reference not to the best and most pros- 
perous business in the trade, nor to the inferior 
firm that barely pays its way, but to the normally 
efficient business. 

There will, of course, be many trades where 
the variety of products and of processes is so 
great, and the changes of method so refined and 
numerous, that it will be difficult to find a stand- 
ard type. In such trades as the chemical, electrical 
apparatus, motor car, there will be many sorts 
of product enjoying special markets within the 
general market, and produced by businesses 
which are undergoing transformations. But 



174 THE SCIENCE OF WEALTH 

though here it may not be possible to point to any 
single or few normal business types, it will none 
the less be the case that expenses and supply 
prices for these classes of goods will be deter- 
mined by the representative rather than by the 
exceptional business. The price of chemicals, 
electric lamps, motor cars, will be based upon the 
expenses and the competition of ordinary, big, 
well-equipped businesses. 

Even in agriculture, where the variety in size 
and sorts of businesses seems illimitable, the same 
principle holds good. When an English farmer 
tells us that wheat cannot be grown at a profit 
when the price is under 305. a quarter, he means 
that a good-sized farm employing modern machin- 
ery and with reasonably good management and 
labour in an ordinary season will make a living 
profit for himself by growing wheat for sale at this 
price. There will, of course, be farms with special 
advantages that will make a bigger margin of 
surplus out of wheat at such a price; other farms 
will still be unable to make it pay. The normal 
farm, in size, equipment, working, management, is 
always in the farmer's eye when he says that 
farming can or cannot pay with wheat at such a 
price, although he may not be prepared to ex- 
plain exactly how he arrives at this normal farm. 
When one comes to special sorts of farming, 
such as fruit-growing, poultry-farming, etc., the 



EXCHANGE AND PRICES 175 

business type becomes more clearly marked, al- 
though a great variety of ordinary farms may 
also contribute to the supply. 

So far as capital and labour are able freely to 
enter any trade and compete for business, this 
competition will tend to select one or a few best 
types of business into whose hands will fall the 
bulk of the trade, and which will determine the 
ordinary expenses of production and the supply 
prices in the markets. If competition in these 
trades yields to combination, and trade agree- 
ments, pools, or trusts come in, it will still be 
these representative businesses that will deter- 
mine prices, so long as the bulk of the supply 
remains in their hands. By restricting output 
they may raise "expenses" so as to include a 
large surplus-profit. But it is they who will regu- 
late the market prices, not the starving indepen- 
dent firms outside the ring. These latter will 
usually "accept " the "ring " prices, making what 
they can out of them. So when the Standard Oil 
Trust raises the price of oil per gallon, or the Sew- 
ing Cotton Trust the price of thread, small outside 
producers generally raise their prices too, instead 
of exposing themselves to danger by under-cutting. 
As trade information becomes more rapid and ex- 
act, reaching a larger number of producers, the 
standardization of sizes and methods of produc- 
tion gains ground, and the number of competing 



176 THE SCIENCE OF WEALTH 

businesses which vary from the approved models 
becomes smaller. Of course it will always remain 
true that exceptional ability and management or 
some special advantage in patents, access to raw 
materials or markets, will enable some particular 
firm or group to suck high profits out of the ordi- 
nary market price determined by their represen- 
tative competitors. 

If, however, these exceptional firms use their 
full business opportunities, they will gradually 
acquire a larger proportion of the trades. For, 
combining with strong trade rivals, they will 
force weaker ones to come in upon their own 
terms, or will crush them. When by these means 
they have formed a combination strong enough 
to enlarge or contract the whole supply of the 
market as they desire, they can fix selling prices 
so as to load costs of production with a large 
monopoly or surplus element. They do not, we 
repeat, need to absorb the whole trade in order to 
possess this power. A "trust," producing 50 or 
60 per cent, of the supply, may sufficiently con- 
trol output and prices, provided the outsiders are 
small and uncombined. Even if in some sections 
of its market there is effective competition at 
lower prices, other sections may yield monopoly 
conditions. 

The economic origin and supports of such 
trusts, combinations and agreements are familiar. 



EXCHANGE AND PRICES 177 

Sometimes they are rooted in access to the best, 
largest or cheapest supply of raw materials or 
power. Such is the basis of the De Beer's diamond 
trust, and the United States Steel Corporation 
derives much strength from possession of superior 
ore and coal. Sometimes railroad or other facili- 
ties of transport enable them to market their 
goods more cheaply than competitors. Such was 
the historic origin of the Standard Oil Company. 
Sometimes the possession of public favour or 
privileges, in the shape of tariff aid, public con- 
tracts, licences or charters of monopoly, is the 
main source of strength. Many companies for 
local services, e. g. gas, water, tramways, electric 
lighting, etc., come into this class. Large size 
of capital, reputation and special knowledge, 
have in certain instances enabled businesses to 
attain local or even wider control of markets. 
Perhaps the most conspicuous example of busi- 
nesses enjoying high profits from this source is 
afforded by the present state of banking in Great 
Britain. 

There is a popular notion that in an age of 
capitalism, since the larger business in a trade is 
always economically stronger and more profitable 
than the smaller, it is only a question of time for 
the whole trade to pass into the hands of a few 
monster firms which, after trying to slaughter one 
another, will end by combining. Thus it is con- 



178 THE SCIENCE OF WEALTH 

ceived will competition work itself out in all the 
industries, leaving a single trust or combine in 
complete control of the market, and able to dic- 
tate prices to the consumer. In a good many 
industries the modern development of business 
life seems to sustain this view. Modern ma- 
chinery of manufacture and of transport and 
modern credit have in many trades made the 
survival of small businesses impossible, and have 
handed over the industry to a few giant com- 
panies. An increasing number of trades ap- 
pear to be going this way, both in the staple 
manufactures, transport, mining, commerce and 
finance. 

But for all that the generalization is unsound. 
A large proportion of industry does not exhibit 
this tendency toward concentration. Even in the 
textile and metal industries large numbers of 
little businesses survive. Some of them, indeed, 
are only semi-independent, being tied more or 
less firmly to larger firms whose minor wants they 
supply. But in every great industrial province 
are found numerous genuine survivals of the small 
business, worked in the home or the small work- 
shop with no expensive machinery and power. 
The essential irregularities of human nature are 
largely responsible for such survivals. Where 
the personal need, or taste, or fit, is the basis of a 
demand, the routine economies of the big business 



EXCHANGE AND PRICES 179 

are at fault. There is no tendency for a high- 
class tailoring or dressmaking business to grow 
beyond such reasonable size as will admit the 
keen personal control of a capable manager. In 
all the luxury trades, where irregularity of demand 
is chronic and where personal taste and caprice 
impose themselves, small businesses are found. 
Work of repair forms a basis of livelihood for 
many artisans, such as shoemakers, carpenters, 
blacksmiths, though the making of the original 
goods has passed under large business enterprise. 
In agriculture, in mining, and in transport, there 
are many kinds of work which are best and 
most profitable in small forms. The small farmer 
still holds his own for many purposes. In 
retail trade, though the monster store has made 
great inroads, the high-grade shop and the local 
shop for minor and for perishable goods widely 
survive. 

Moreover, even where the economy of pro- 
duction on a large scale prevails, it does not fol- 
low that no limit can be set upon the advantage of 
size. Because a big business can produce more 
cheaply than a little business and so can undersell 
it, it does not follow that a still bigger business can 
beat the big business at this game. Even in those 
industries where the size of capital counts for 
most, there will be a maximum type which cannot 
be exceeded without damage. When a business 



180 THE SCIENCE OF WEALTH 

grows in size and complexity beyond a certain 
scale, there will be waste of central control in the 
co-ordination of the parts which will outweigh the 
mere economies of size. After a manufacturing 
business has grown to a scale enabling it to buy 
its materials, to organize its labour, to market 
its produce and to obtain credit, on the best 
terms, any further addition to its size will weaken 
it and render it less profitable. This size of 
net maximum efficiency will vary widely in the 
different trades. In some trades it will only be 
reached by a giant business which in its growth 
has swallowed its competitors and stands alone 
in the market, a monopolist. But such trades 
are the exception not the rule, even in coun- 
tries where a protective tariff favours them by 
isolating the national market. Mere advantage 
of size, unaided by natural or legal supports, 
very seldom suffices to put a business into the 
position of a monopolist, able to dictate prices to 
buyers. 

The real risk to w^hich consumers are exposed 
in modern industry is rather that of suspended or 
mitigated competition among a few larger busi- 
nesses than that of a complete monopoly. The 
economy of big production seldom hands over a 
market to a single firm, but it often reduces the 
number of effective competitors to a paucity that 
enables them by agreements to regulate output 



EXCHANGE AND PRICES 181 

and fix prices high enough to yield them a con- 
siderable surplus profit. A great amount of ex- 
perimentation in methods of federation and 
agreement among big firms in the same line of 
business is continually going on, and perhaps 
constitutes at the present time a graver menace to 
the consuming public than any domination of the 
"trust." The metal and machine-making trades, 
for instance, in Great Britain and America, are 
riddled with agreements for regulating selling 
prices, while shipping and railroad, insurance and 
banking companies, are continually forming 
"combines," "conferences " or other associations 
for regulating services and prices. Wherever one 
turns in modern industry, combination shows 
itself as real and almost as pervasive a force as 
competition. Now, since the prime motive and 
meaning of all these forms of combination is the 
acquisition of "surplus " profit, it is evident that 
no survey of market prices, or rates of exchange 
between different sorts of goods and services, 
can ignore the loading which these surpluses 
involve. 

The history of every stock of goods exposed 
in shops for sale, if thoroughly investigated, would 
show that, at various stages in their handling, the 
expenses which they accumulated contain pieces 
of unproductive surplus that, entering into the 
market price at some earlier stage, are handed 



182 THE SCIENCE OF WEALTH 



on to the later stages with fresh accretions, so 
that in the final shop-prices cost and surplus are 
inextricably intertwined, the proportions between 
the two differing in all the various kinds of 
articles. 



CHAPTER X 

DEMAND AND SUPPLY 

Regarding the industrial system as a machin- 
ery for the production of wealth, we have natur- 
ally been led to find the origin of that wealth in 
raw materials which, passing through the various 
productive processes, gather value or importance 
from the work which is put into them, until as 
finished commodities they pass out of the machine 
into the hands of consumers. The growing 
quantity of work which they embody is repre- 
sented in a continual growth of expenses and 
of price as the goods near completion, these 
expenses containing the sum of all the costs 
and surpluses entering at the different stages of 
production. 

This picture of raw materials and goods con- 
stantly absorbing productive energy and expenses 
as they flow towards consumption, ignores, how- 
ever, the controlling part exercised by the con- 
sumer. The end and aim of this application of 
productive energy is the satisfaction of the wants 
of consumers.^ We have already seen how the 

1 This general truth, like most others, needs qualifying. 
Some productive activity is desired on its own account. 
183 



184 THE SCIENCE OF WEALTH 

money paid over the retail counter for com- 
modities, circulating up the stream of production 
as payments for the various productive agents, 
continually stimulates the output of productive 
energy. By this demand for commodities the 
will of the consumer controls and regulates the 
entire system of production. That system exists 
to furnish him with "utilities.'* To him the 
commodities he buys are storehouses not of 
productive costs but of utility. The raw mate- 
rials and goods in their various stages of produc- 
tion take all their value or importance from the 
final part they are to play as means of utility 
or human satisfaction. The machinery and 
other instruments of capital are similarly endowed 
with a utility from the consumable commodities 
whose production they assist. The whole of the 
industrial system can be regarded, from this 
standpoint, as an arrangement of goods and 
instruments containing various sorts and quan- 
tities of utility. 

The utility of which we here speak is not 
the intrinsic worth of things, their "values" 
in Ruskin's sense as yielding true vital service 
by their consumption. It merely measures 
the actual current satisfaction which consumers 
impute to various sorts and quaHties of goods, 
not the satisfaction they "ought" to impute to 
them if they understood their true interests. 



DEMAND AND SUPPLY 185 

Thus a sovereign's worth of raw whiskey must, 
for our present purpose of scientific analysis, be 
deemed to have the same utility as a sovereign's 
worth of bread or "best books." It is the actual 
desires that are operative. But a mere desire for 
"utilities" and commodities containing them 
has no effect. In order that a desire may be 
"effective" it must express itself through pur- 
chasing power. The unsatisfied needs and desires 
of poor people for goods that are beyond their 
meagre incomes have no economic, though they 
may have a deep social significance. The only 
utility that counts expresses itseff through the 
use of actual incomes. The use of incomes, indi- 
vidual and collective, may thus be regarded as the 
final regulator of the industrial system. 

In our business analysis we arrived at the 
conclusion that business men organized the 
various trades and businesses, actuated by 
the desire for profits. We have now to realize 
that these organizers and administrators are 
themselves the instruments or agents of the 
consuming public. For the business men, who 
by their demand for capital and labour deter- 
mine how much of these productive forces shall 
go into this trade or that, are governed in their 
turn by calculations of the quantities of products 
they can market at a profitable price. Thus, in 
the last resort, it is the actual and expected 



186 THE SCIENCE OF WEALTH 

demands of customers that really determine how 
much industrial energy of various sorts goes into 
the different trades. 

The order and the disorder of industry, then, 
are mainly attributable to the will of the con- 
sumer operating through demand for commodi- 
ties. It is to the urgency and importance of 
the different "demands" of the consumer that 
we must look for a chief explanation of the size 
of the different trades and the proportion of the 
productive force that they employ. 

The simplest way of understanding the con- 
trol of the consumer is to begin with a one-man 
system, the case of a Robinson Crusoe. How 
would such a man who had by his own efforts 
to supply all his needs dispose of his time? His 
principal requirements are food, clothing, a hut 
and some tools and weapons. If the climate is 
tolerable, a certain minimum of food will rank 
first among his needs. An average of, say, two 
hours' work in hunting and preparing food, let us 
suppose, will give him that amount. If he wants 
more variety or quantity of food, and, not content 
with picking fruit and killing game, wishes to 
till a piece of land so as to raise crops, that will 
take a third and a fourth hour a day. But some 
clothes, though less urgent a need than the food 
obtainable by two hours' work, may be as desir- 
able as the food which a third hour would secure 
and more desirable than that of a fourth hour. 



DEMAND AND SUPPLY 187 

So he has to balance clothing against food for 
the use of his third and fourth hours in the 
working day. He can make and repair the 
barely necessary clothing in one hour a day, 
though two hours would give him a change in 
case of bad weather or damage. But a hut is 
nearly as essential as the first suit of clothes and 
more essential than the second. So he may 
decide to give only the third hour to making 
clothes and the fourth to making a hut. But a 
really commodious hut will take more than one 
hour a day to make and maintain. Shall he give 
his fifth hour also to hut-making? Some tools or 
weapons also have their claim. Shall they come 
in at this point, or only in the sixth hour of his 
working day, after two hours are given to hut- 
making? But the extra supply of food, post- 
poned for the sake of clothing and a hut, may 
here again press its claim. He must evidently 
balance the three claims in his fifth hour, that of 
improvements in his hut, the making of an 
axe, or the laying in a further store of food. Of 
course the real problem will be a good deal more 
complex than this. There will be several sorts 
of food competing with one another for his time 
and energy. When he has got a certain amount 
of fruit, though he could do with more, he would 
prefer hunting for some flesh and fish. So, with 
the other needs, not only an axe but a spade, a 
bow, a hammer, are very useful: they also have 



188 THE SCIENCE OF WEALTH 

claims upon his time. If he is a thoughtful man, 
he will adjust these various claims upon an 
economical principle, so as to make the best use 
of his working time. He will not go on making 
food when he has enough to satisfy his hunger, 
because though he could do with some more, 
the need of some clothing will assert itself more 
strongly. So with all the other needs, he will 
balance them against one another, so as to get 
the maximum of utility out of his day's work. 
He will stop doing each sort of work as nearly 
as possible at the point where any further prod- 
uct will be felt by him as slightly less desirable 
than some other thing that he could employ the 
time in making. At that second thing he wiU 
go on working until he has got as much as is 
quite necessary, and a third want becomes more 
urgent than an increased satisfaction of the 
second want. So far as he thus apportions his 
working time to the best advantage, it will be 
found that the last quarter of an hour which he 
gives to food is neither more nor less usefully 
employed than the last quarter he gives to 
clothes-making, to his hut or to making tools. 
For if we supposed the last quarter of an hour 
given to food produced a greater utility than 
that given to hut-making, it would be a wasteful 
use of time. So far as he consults clearly his 
best interests, he will arrange his different em- 
ployments so that the last portion of the products 



DEMAND AND SUPPLY 189 

of all of them are equal in the use or enjoyment 
they afford. 

Now suppose that other people come and 
settle upon Crusoe's island, and he is able to 
get an income for himself by letting or selling 
desirable building sites. With this income he 
now satisfies his needs by setting other persons 
to produce various sorts of goods which he buys 
from them. The expenditure of his income will 
be conducted on the same lines as the expenditure 
of his working day when he worked for himself. 
Instead of laying out just so much time in mak- 
ing each several sort of food, clothes, house, etc., 
he will lay out just so much money. Part of his 
income he will spend on food, part on clothes, 
part on housing, etc. Though the first part of 
his food will have a very high utility, being the 
first necessary of life, the last addition to the 
food supply he buys will have the same import- 
ance or utility for him as the last addition to 
his clothes, housing or any other goods. Say 
that he spends £10 a year on bread, though the 
loaves he buys with the first five of these ten 
pounds have an enormous utility for him, the 
loaves he buys with the last pound could easily 
be dispensed with, and have neither more nor 
less utility for him than the last pound's worth 
of the £10 he spends on clothing or the last 
pound's worth of the £5 he spends upon cigars. 
The last pound's worth of loaves, clothing and 



190 THE SCIENCE OF WEALTH 

cigars he buys must have the same importance or 
utility for him, so far as he lays out his income 
thoughtfully, for if we supposed the last loaves 
he bought to contain more utility than the last 
cigars, he would have acted irrationally and 
uneconomically in not increasing his expenditure 
on bread and reducing his expenditure on cigars. 

So far, then, as a man uses his income eco- 
nomically so as to get the largest amount 
of utility from spending it, the last or least ser- 
viceable portion of each sort of goods he buys 
will have the same utility. Though he may 
estimate the total importance of his weekly 
supply of bread far higher than that of his weekly 
supply of tea, and the latter higher than that of 
his supply of tobacco, the last shilling he spends 
on bread must be deemed to furnish him the 
same quantity of satisfaction as the last shilling 
spent on tea or tobacco. 

Now what applies here to the expenditure 
of an individual will be equally found appli- 
cable to the more complex expenditure of the 
income of a whole community. This aggregate 
income of the members of a community is spent 
partly in buying supplies of various sorts of 
foods, clothing and other prime necessaries or 
comforts, partly in buying innocent or noxious 
luxuries. Though it is evident that the first 
half of what is spent in foods and other neces- 
saries provides far more utility than the first half 



DEMAND AND SUPPLY 191 

of what is spent on luxuries, it remains true that 
the last or least useful portion of the bread, 
meat and other "necessaries" that is bought for 
consumption is just as much or as little useful as 
the last portion of any of the luxuries. The fact 
that the last portion of the bread supply might 
have a very high utility, if it could get into the 
homes of needy persons, is not here relevant. 
The last portion of the bread supply actually 
sold goes to swell the waste of the servants' hall 
in wealthy families, and gives out no more utility 
than the last box of cigars or the last bottle 
of champagne consumed in the dining-rooms of 
the same families. 

If, then, we were to take the real income of 
this country, the supply of loaves, fish, flesh 
and fowl, the clothing, furniture, housing, jewel- 
lery, etc., turned out of the industrial machine 
in a year, we should find that the least service- 
able part of each of these sorts of goods, when 
consumed, yielded the same amount of utility 
or satisfaction. For this balance at the bottom 
of each supply is rendered necessary by the 
consideration that consumers are always com- 
paring and balancing against one another the 
different objects of their desire in laying out the 
last portions of the money they have to spend. 
As, then, each individual gets the most for his 
money by purchasing a number of supplies the 
last portions of which represent to him an equal 



192 THE SCIENCE OF WEALTH 

amount of utility, so it will be with the aggre- 
gate of individuals. 

The objection will no doubt occur that, with 
the very unequal distribution of incomes among 
the various classes, a great waste of aggregate 
utility will occur. For the loaves, shirts, chairs, 
meat, which, forming the least serviceable expen- 
diture of the rich, have least utility attached to 
them, might have a high utility if they could have 
been purchased and consumed by the poor. 
But that criticism, valid enough against the dis- 
tribution of income, does not impair the accuracy 
of an analysis of utility based upon existing 
facts of distribution. In considering the control 
which the actual consumer exercises upon indus- 
try through demand for commodities, it is im- 
portant clearly to recognize the equalization of 
utility at the base of each supply as the immediate 
instrument for regulating industry. 

In this levelling process of expenditure on 
the part of a person or a society there is nothing 
mysterious. It is simply "economy," the laying 
out of money or of effort to the best advantage. 
Every child who, with a shilling to spend, decides 
to spend twopence on chocolates, threepence on 
shot, sixpence on a cinematograph show and a 
penny on a comic paper, performs this operation 
of comparing and equalizing marginal "satis- 
factions" or "utilities." So far as the greater 
part of expenditure is concerned, the process 



DEMAND AND SUPPLY 193 

involves no thought, it runs by routine. If a 
man has an income of £500 a year, no question 
arises as to how £450 shall be laid out. But as 
regards the last £50, how much of it shall go for 
holidays, how much for theatres, books, sub- 
scriptions, how much for savings, that will be a 
matter for some careful calculation or individual 
adjustment. No two men with £500 will spend 
the last £50 in the same way: no man will dis- 
tribute this expenditure in the same way two 
years running. As with an individual, so with a 
whole society. Most of the income of a nation, 
as of a person, is by necessity or habit allocated 
to settled expenditure in maintaining a standard 
of consumption. Only the last portion, or any 
increase of income, is subject to the process of 
adjustment which we describe. This gives great 
interest and significance to the last or "mar- 
ginal" portions of income in directing changes of 
industry. The introduction of a new luxury, 
the stimulation of a new taste in a consuming 
class, will evidently cause a flow of capital and 
labour into the industrial processes which are 
needed to supply the article. The sudden direc- 
tion of a large portion of the "spare" income of 
the well-to-do into a demand for motor cars has 
brought masses of new capital and labour into 
the trades providing them, has helped to make 
a rubber boom, and has injured the carriage trade 
and certain other luxury trades. So it is through 



194 THE SCIENCE OF WEALTH 

all the grades of a society; new articles of con- 
sumption, music halls and skating rinks, cheap 
reprints, canned meats, bananas, popular drugs, 
force their way, first as casual claimants, then as 
habits, into the expenditure of some grade of 
the working classes, with important direct and 
indirect reactions upon the trades that supply 
them, or that supply other articles which they 
have displaced. 

One is tempted to conclude that in these 
changes of taste or valuation which regulate 
the last items of expenditure are to be found 
the governing forces of industrial life. And 
great significance does rightly attach to them 
as indexes and instruments of economic move- 
ment. But it is a mistake to find in them the 
special causes or determinants of industrial 
change. For this would be to neglect two impor- 
tant considerations. In speaking of the new 
demand for motor cars we assumed that it 
originated in a new taste of rich consumers. But 
new inventions and economies of production 
which put reliable cars on the market at lower 
prices stimulated and made effective this new 
demand. And in most cases where a large rapid 
increase of expenditure upon any article takes 
place, improvements and economies of produc- 
tion have served to stimulate the increased 
demand. In a word, there is interaction between 
the forces of supply and demand. A large cheap 



DEMAND AND SUPPLY 195 

supply of cars stimulates an expansion of demand, 
expanded demand stimulates a cheapening and 
enlargement of supply. So it is with almost all 
economic changes. The same economy, the 
same constant process of adjustment towards 
an equilibrium, is taking place in production as 
in consumption. The new or unappropriated 
capital and labour and utility tend constantly 
to flow into those trades in which some recent 
increase of demand has raised the rate of interest, 
profit, wages, slightly above the ordinary level 
of other trades, and it goes on flowing until the 
increased supply of products in the chosen trades, 
by lowering prices, has restored the profit, 
interest, wages, to the common level. The in- 
creased supply and falling prices thus brought 
about in the special trades in question, will cause 
consumers to demand larger quantities of these 
products and will extend their uses to other 
grades of the consuming public, until a new 
balance or equilibrium has been reached in the 
utility or satisfaction of the consuming public. 
Those disturbances and readjustments are always 
going on, alike in the costs of industry by inven- 
tions and improvements, and in the utilities of 
consumption by changes of taste and growth or 
decay of needs. 

Another consideration is equally important. 
If we watched a number of tanks of water con- 
nected by pipes with one another, all the changes 



196 THE SCIENCE OF WEALTH 

we saw would appear to be taking place at the 
surface, by a rise or a fall of that surface. If an 
additional supply of water were furnished to 
one tank, we should see the surface rising in 
each other tank in its turn until the common 
level was reached again. But though for obser- 
vation and registration it would be best to con- 
fine our attention to the changes on the surface, 
it would be wrong to conclude that the causes 
which brought about these changes had any par- 
ticular reference to the portions of the water on 
the top. For it might well be the case that the 
new supply of water to the first tank were made 
not at the surface but below, and that all the 
pipes connecting the tanks and causing the 
readjustment discernible upon the surface lay 
deep down. So in industrial changes both on 
the side of production and consumption the 
direct forces of change need not operate at the 
"margins," the least efficient portions of indus- 
trial power or the least pressing needs of the 
consumer. In industry some new general economy 
applied by all the representative firms of a trade, 
or a series of trades, some new economy of fuel, or 
the utilization of a waste product, will, by raising 
the margins of profit throughout the whole indus- 
try, regulate the distribution of the new capital 
and labour, so as to secure, as far as free com- 
petition exists, an equilibrium of profit among 
the various industries. So in the public consump- 



DEMAND AND SUPPLY 197 

tion, the initial movement of change may be 
found not in the stimulation or expansion of 
some new taste just struggling into fashion, but 
in some alteration in the past standard of con- 
sumption in large sections of the public, as, for 
example, in a general weakening of the taste for 
alcohol, or a general rise of such an item as an 
annual seaside holiday in the scale of values of 
the large mechanic classes. 

The changes at the margin, the readjustments 
of the least valued items of expenditure, of the 
least profitable items of industrial energy, are 
thus to be regarded rather as instruments for 
registering changes than as the determining 
causes. 

What is supremely important is that students 
of industry should clearly recognize the methods 
by which the continual changes in the arts of 
industry and the valuations or taste of consumers 
alter the structure of the industrial system. 
These forces from the supply side and the demand 
side meet in what is called a Market, and their 
opposing tendencies are reconciled in the market 
price. A market price is that price which equal- 
izes the rate of demand with the rate of supply, 
i. e. just enables all the goods offered in the 
market to find buyers. Take the instance of a 
cattle-market where a sale of bullocks is taking 
place. For simplicity we will suppose that all 
the bullocks for sale are known by all the parties 



198 THE SCIENCE OF WEALTH 

concerned to be of the same size and quality. 
Some of the sellers are in urgent need of cash 
and would be prepared to sell a bullock at a 
low figure, say anything above £5. Some of the 
buyers are better off than others, and, being 
keener to buy, would pay a price as high as £12 
rather than fail to get a bullock. Let us set 
out the market acording to the number of willing 
buyers and sellers at different prices — 



Price 


No. 


of sellers 


No. 


of buyers 


£5 




2 




12 


6 




3 




12 


7 




4 




10 


8 




6 




8 


9 




7 




7 


10 




9 




6 


11 




12 




4 


12 




12 




3 



If the bidding begins at £5 there are only 2 bul- 
locks offered at that price and 12 willing buyers, 
all willing to pay more if necessary. The market 
price evidently cannot stand at £5, for at that 
price 10 willing buyers would be left without a 
bullock, and to prevent being left would bid 
more than £5. They would first bid £6. But 
at that price there would only be 3 bullocks for 



DEMAND AND SUPPLY 199 

sale and 12 willing buyers. The latter, still 
bidding against each other, would force the price 
to rise higher. At £7 and at £8 the same diffi- 
culty would remain. Though the number of 
bullocks offered and the number of willing buyers 
approached nearer, so long as there was one 
more buyer than there was bullock, he, fearing 
to be left, would bid against the others so as to 
raise the price. When this excess of buyers over 
sellers had thus driven up the price to £9, there 
would be found to be 7 sellers and 7 buyers at 
that price, i. e. supply is equal to demand. Could 
the price rise higher.? No, for at £10 there would 
be 9 sellers and only 6 buyers, and the com- 
petition of the extra sellers would force the price 
down to £9, just as the competition of the extra 
buyers had forced it up to that level. £9 is seen 
to be the only possible market price, for it is 
the only price at which the number of willing 
sellers and willing buyers is the same. So long 
as supply exceeds demand the price rises, so long 
as demand exceeds supply the price falls. The 
market price is at the point where supply is 
equal to demand. 

This is true of every market where anything 
is bought and sold by processes of bargaining. 
Where buying and selling is continuous, as in 
most wholesale and retail markets for the sale of 
wheat, cotton or other produce, stocks and 



200 THE SCIENCE OF WEALTH 

shares, or loaves, fish, shoes, coal or other com- 
modities, it is not a fixed quantity of supply or 
demand that determines the price but the rate 
of supply and demand. The market price in 
London for wheat at any time will be determined 
at, say, 25s. a quarter, by the fact that at that 
price the rate at which wheat is offered at Mark 
Lane is equal to the rate at which it is being 
bought by millers and other purchasers. Where 
the market is a continuous process. Supply and 
Demand are to be regarded as "flows" measured 
over a period of time rather than as fixed quan- 
tities bought and sold at a particular time, as 
in our instance of the cattle market. 

When Midland Railway Stock is said to sell 
at a firm price of Q5y that means that for some 
time the number of shares offered at that figure 
continues to be the same as the number of shares 
bought. 

Changes of price always mean an upset in 
the equilibrium between the rate of supply and 
the rate of demand. 

So long as the body of sellers in a market can 
go on selling their goods at the same pace as 
hitherto, they will not lower and they cannot 
with advantage raise the price. If they lower 
the price, they do so either because there is a 
fall off in the pace at which buyers ask for the 
articles, or because they have increased their 



DEMAND AND SUPPLY 201 

stocks and wish by lowering prices to raise de- 
mand so as to meet the increased rate of their 
sui)ply. If they raise their price, it is either 
because buyers are buying more frequently, or 
more largely than before, so depleting their 
supply more rapidly, or because they are finding 
a difficulty in getting a supply of goods at the 
same price as before. Thus the immediate cause 
of a rise of price is always a decrease of supply 
or an increase of demand; the cause of a fall 
of price is always an increase of supply or a 
decrease of demand. 

Whenever the equilibrium between Supply 
and Demand is thus disturbed, the price con- 
tinues rising or falling until a new level is reached 
where the two are again equal. This readjust- 
ment is a natural tendency. For if an increase 
in Supply has caused prices to fall, that fall will 
in itself stimulate an increase in the number of 
buyers or rate of demand. Similarly, if a de- 
crease of Supply causes prices to rise, that rise 
of prices will reduce the number of buyers. The 
pace at which this tendency works will differ 
with different commodities. In some cases a 
small rise or a small fall of price will have a 
considerable effect upon demand. This will 
usually apply to luxuries, which do not satisfy 
any strong desire, or to articles for which there 
is a convenient substitute. In the case of neces- 



202 THE SCIENCE OF WEALTH 

saries or articles with no easy substitute a mod- 
erate rise or fall of price may be attended by 
little increase or decrease of demand. In the 
former case the "elasticity of demand" is said 
to be small, in the latter case large. The rise in 
the price of spirits, following the recent increase 
of liquor duties, caused a large reduction in the 
demand for spirits. A corresponding rise in 
price of wheat would not cause a corresponding 
reduction in demand for bread. It might even 
cause no reduction, so far as large classes of the 
workers were concerned. For the rise in price 
of bread might cause them to buy less meat or 
other foods, in order to be able to keep up their 
consumption of the staff of life. The effect 
which a rise or fall of 10 or 20 per cent, in the 
price of any article will have upon demand will 
evidently depend upon a great number of cir- 
cumstances, and will differ in different social 
classes and grades of income. 

Where the change of price is effected from 
the demand side, similar effects will be produced 
upon rate of supply. In some cases an increas- 
ing sale will enable goods to be produced more 
economically than before, so that the rise of 
market price will be very slight and very tem- 
porary, resulting soon in a new equilibrium of 
demand and supply at a lower price than before. 
In other cases an increasing sale may stimulate 



DEMAND AND SUPPLY 203 

supply only by causing a considerable rise of 
price, as where in order to create the new required 
supply worse land or dearer labour must be 
brought into use. According as supply does or 
does not respond easily to the stimulus of rising 
prices we speak of it as "elastic" or "inelastic." 

All these important occurrences in the eco- 
nomic world which are said to affect prices work 
by means of this mechanism of Supply and 
Demand. A bad harvest, a new discovery of 
gold, a war, a rapid growth of population, a new 
invention for cheapening electricity, a temper- 
ance movement, affect prices, sometimes tempo- 
rarily, sometimes permanently. But in all cases 
the modus operandi is to be traced in changes of 
the relation between supply and demand in the 
markets. 

Most markets with their market prices are 
liable to numerous minor fluctuations from a 
variety of passing and casual causes. But 
behind or beneath these slight oscillations are 
to be traced large and abiding changes due to 
more important alterations in the arts of pro- 
duction or consumption. These normal or last- 
ing changes in prices will arise from, or be ex- 
pressed through, rises or falls in the ordinary 
expenses of production on the one hand, or in 
the ordinary utility of consumption upon the 
other. 



204 THE SCIENCE OF WEALTH 

Expenses of production will rise or fall either 
(1) by reason of some alteration in methods of 
production affecting costs, or (2) because of some 
increase or reduction in the "surplus" with 
which expenses may be loaded. 

(1) Under alteration of methods of produc- 
tion will come (a) all those improvements in 
the arts of industry due to mechanical, chemical 
and other sciences, which are the leading feature 
of the Industrial Revolution; (b) improvements 
in business organization and enterprise, both on 
their productive and their commercial side; (c) 
improved skill, physique, education and char- 
acter of the workers. 

(2) Under influences affecting the "surplus" 
element we may include (a) discovery or de- 
velopment of natural sources of wealth, or the 
depletion of such sources causing increased 
scarcity and a larger surplus to arise in some 
necessary process; (b) an increase or decrease 
of the flow of capital into any country or any 
industry, raising or lowering the expenses of 
production. This flow of capital is, of course, 
affected by innumerable causes related to the 
size and distribution of income, security of 
property, foresight, thrift and other conditions 
affecting saving and investment; (c) an increase 
or decrease of the flow of labour into the several 
countries and trades, determined by growth of 
population, facilities of information and of 



DEMAND AND SUPPLY 205 

transport, and influencing division of labour and 
the labour-costs of production. 

All these causes affecting expenses of pro- 
duction will impress themselves upon prices 
through enlarging or restricting supply. Some 
of them, being of a general character, will affect 
most of the industries of a country, or of the 
world, though in different degrees, as, for in- 
stance, improvements in generating power for 
manufacture or transport. Others, being of a 
special kind only applicable to some trades, will 
raise or lower the expenses of certain products 
and affect their rate of exchange with other 
products. 

Corresponding to these forces playing through 
expenses of production upon Supply are other 
forces, playing through utility upon Demand. 

(1) An immense number of changes are always 
going on in the arts of consumption, i. e. in the 
utilization of the various forms of wealth. An 
improved fire-grate saving fuel, a change in 
taste or habits of food or dress, a keener appreci- 
ation of books or recreation, and a thousand other 
changes, will result in increased or reduced de- 
mand for various commodities. New tastes and 
desires are constantly competing with and dis- 
placing old ones, and often by their adoption 
involve many other alterations in consumption 
and expenditure. The reduced use of alcohol, for 
instance, may involve less consumption of meat 



206 THE SCIENCE OF WEALTH 

and a higher valuation for dairy produce and 
vegetable foods. 

(2) Apart from such changes in tastes and 
habits, a mere increase or decrease in the size 
of the income of a nation or a class will bring 
about changes in the proportion of expenditure 
upon the various products. The general growth 
of income in large sections of our workers has 
expressed itseK in an increased appreciation for 
holidays and amusements: the large growth of a 
"super-tax" class has brought an increasing 
demand for motor cars and other expensive 
luxuries. 

Such are the forces which at every point of 
the industrial system are operating upon Supply 
and Demand to bring about the shifts of prices 
that are constantly taking place. 

If we regard the Consumer as calling into 
being, maintaining and directing, by his needs 
and tastes, the whole of this great elaborate 
system of industrial forces, we shall see this 
Consumer's will operating everywhere through 
demand, first for commodities, and secondly 
for the various productive steps and instruments 
which are the necessary means to his end. 

If, on the other hand, we take the stand- 
point of the business man, or Producer, we shall 
see the same structure and operation of the 
industrial system as a gathering stream of material 



DEMAND AND SUPPLY £07 

and energy given out by various co-operative 
groups of factors of production, land, labour and 
capital, under the local guidance of business 
ability, moving towards the creation of quan- 
tities of finished marketable goods and services. 



CHAPTER XI 

THE LABOUR MOVEMENT AND STATE 
SOCIALISM 

The saying that all progress consists in the 
elimination of waste has a special applicability 
to the art of economic progress. It furnishes 
a test for the validity of the various methods of 
social-economic reform which play so conspicu- 
ous a part in modern history. In particular it 
can be seen that the Labour Movement on the 
one hand, and the enlargement of the industrial 
functions of the State upon the other, are vir- 
tually dependent on the existence of a surplus. 
It will be worth while to make this dependence 
clear. 

If there were no unproductive surplus in the 
hands of capitalists, landowners and business 
men, the validity of the Labour Movement would 
hinge almost entirely upon the economy of high 
wages, short hours, and other improved condi- 
tions. For if the competition of employers and 
capitalists throughout the industrial system 
were everywhere so keen and constant as to 
208 



THE LABOUR MOVEMENT 209 

keep down profits, interests, and other business 
emoluments at a minimum, any co-operative 
action of the workers, involving an additional 
cost of labour without a corresponding increase 
in the productivity of labour, would evidently 
prove disastrous for all the partners in industry. 

In other words, the success of the Labour 
Movement would be confined to cases where 
higher wages, shorter hours, etc., raised the 
efficiency of labour so much as to involve no net 
increase in the labour-cost. If this view were 
correct, all conflicts between capital and labour 
would be wanton acts of folly on one side or on 
both. For if higher wages and improved con- 
ditions of labour of necessity were followed by 
a corresponding rise of productivity of labour, 
how fooHsh and inhuman for employers to re- 
sist such demands ! And how wrong trade unions 
would be to urge demands which, going beyond 
"the economy of high wages," could not be 
conceded by employers without ruining their 
businesses ! 

But the existence of a large composite surplus 
not required to maintain the other factors of 
production, but taken by them to be applied to 
purposes of luxury and waste, supplies a rational 
basis for the Labour Movement. If the workers 
by organizing, alike in their several trades and 
as an economic and political unity, can secure 



210 THE SCIENCE OF WEALTH 

portions of this surplus, applying it in the form 
of higher wages and more leisure to raise their 
standard of life and work, they are converting 
waste into genuine wealth. If trade-unionism, 
through collective bargaining, can secure higher 
wages, by reducing the payments made as rent, 
surplus-interest, and surplus-profit, no damage 
is done to the other factors, while an important 
contribution has been made to the improved 
efficiency of labour. 

To this main object the policy of collective 
bargaining is directed. Its success, like that of 
other policies, depends upon the knowledge, 
skill and temper with which it is applied. Our 
analysis discloses many wide differences in the 
quantity of surplus available for distribution in 
the different trades. In some cases a large por- 
tion of the product goes as surplus-profit, or 
excessive interest, or is paid away in rents. This 
is the case where free competition has given 
place to combination among employers, or where 
some landowner, royalty-owner, patentee, or 
other monopolist, is able to rack-rent an in- 
dustry. Other trades stand on a different foot- 
ing, close competition among employers keeping 
down interest and profits at a minimum, and 
landlordism taking comparatively light toll. 
The same trade will at one time exhibit a large 
surplus profit, at another none. 



THE LABOUR MOVEMENT 211 

The tactics of Trade Unionism consist in 
applying pressure at those industrial points 
where it can be applied with safety. An indis- 
criminate demand for higher wages, shorter 
hours, or any other condition involving a higher 
wage-bill, would prove injurious to industry 
and the injury would rapidly react upon the 
workers. For an industry where keen competi- 
tion keeps down profit and interest to a mini- 
mum has no surplus capable of being applied to 
raise wages, and if by sheer strength of organiza- 
tion higher wages could be got, the trade may 
suffer damage in one of two ways. If foreign or 
other outside competition prevents the em- 
ployers from raising the price of the product so 
as to meet the enhanced expenses of production, 
the trade will perish because no fresh capital 
will flow into it, and the wear and tear of exist- 
ing capital will not be replaced. If it is possible 
to raise the price of the product, that rise of 
prices, as we have seen, must cause a shrinkage 
of demand, and this will mean a reduction of 
employment of labour which in its turn must 
damage the efficiency of the labour organiza- 
tion. The validity of collective bargaining as 
an instrument for raising wages, or shortening 
hours, clearly depends upon the directing and 
the timing of demands so as to secure for the 
workers the whole or part of some unproductive 



212 THE SCIENCE OF WEALTH 

surplus ascertained to be in the possession of 
one of the other factors with which labour is 
co-operating. It is not the true interest of labour 
to seek to encroach upon such interest, profits, 
or other elements of income as are necessary to 
evoke the full use of other factors of production. 
But where any payment in excess of this amount 
is made, organized labour is economically justi- 
fied in trying to divert this surplus into higher 
wages. 

Whether, and to what extent. Trade Unionism 
can succeed in thus raising wages, or otherwise 
improving the conditions of labour, at the ex- 
pense of surplus-interest or profits, depends upon 
the relative strength of the organizations of 
workers and of employers. When a strong or- 
ganization of labour has placed effective restric- 
tions on the competition of "free" labour, it 
has often been able to bring such pressure on 
keenly competing employers as to raise wages 
at the expense of surplus interest or profit. But 
where employers have organized to meet such 
pressure, placing restrictions in their turn upon 
the inroads of "free" capital entering their trade, 
they have usually succeeded in defeating the 
pressure of organized labour. For their smaller 
number, larger resources, and better informa- 
tion, render their organization more effective in 
a conflict. Even in skilled and well-organized 



THE LABOUR MOVEMENT 213 

departments of labour there is a growing recogni- 
tion of the inadequacy of Trade Unionism as a 
method of securing for the workers a sufficient 
share of the surplus wealth. Moreover, it is 
made continually more evident that the very 
policy which strong trade unions must adopt to 
limit the inflow of "free" labour from outside 
renders it more difficult for lower-skilled workers 
to organize their labour markets, which are 
flooded with the labour excluded from entry into 
the higher grades of employment. 

The recognition of these facts is driving the 
Labour Movement into politics. There is a 
disposition among the workers, who form the 
majority of citizens, to use the State in order to 
supplement trade union and other private co- 
operative and philanthropic efforts to raise their 
standard of work and life. Although history 
shows that the State has always been utilized 
for the economic benefit of any class which ac- 
quired political control or influence, virtuous 
citizens have always protested against the par- 
tiality and corruption involved in such use of 
politics, and now profess concern lest the 
working classes should injure both the State 
and industry by unwise interferences with 
private enterprise and with the rights of pri- 
vate property. 

"Because landowners, manufacturers, and 



214 THE SCIENCE OF WEALTH 

other business classes have in the past used 
poHtics for their own economic ends, making 
and administering laws, treaties or tariffs, and 
using the diplomatic and military forces of the 
State for their business purposes, that is no rea- 
son why the workers should, if they get the 
power, follow the same dishonest and misguided 
policy in the interests of their class." Such is 
the objection. In reply, it is often deemed suffi- 
cient to insist upon two points. In the first 
place, it is contended that where the working 
classes form, as they do, the overwhelming 
majority of the electorate, their voice and their 
interests may be considered as the voice 
and interests of "the people " in a country 
where majority rule is acknowledged. Sec- 
ondly, it is contended that many or most 
of the demands which the workers would 
enforce through the State consist in the al- 
teration or reversal of legal rights or other 
advantages secured by landowners, capitalists, 
and other business classes formerly in control 
of the State. 

Now, though -both these answers have some 
force, they do not suffice to meet the economic 
objection, that the wage-earning classes might 
use their political power to injure the industrial 
system and to check the growth of wealth, by 
a short-sighted endeavour to raise wages and 



THE LABOUR MOVEMENT 215 

improve the condition of labour at the expense 
of the propertied classes. 

The only effective answer is to show that the 
demands which labour seeks to enforce by means 
of the State, though primarily motived by the 
interests of a class, are ultimately consistent with 
and conducive to the interests of society as a 
whole. This is not proved merely by pointing 
out that the workers are by far the largest class. 
It must be shown that the policy they advocate 
is not in the long run injurious to the structure 
of industry. Now the acceptance of the doc- 
trine of an unproductive surplus undoubtedly 
supports this interpretation of the labour policy. 
For so far as it is accurately directed to convert 
portions of the unproductive surplus into in- 
creased wages and leisure and other improved 
conditions of labour, the labour policy can claim 
to be a social policy. By transforming unpro- 
ductive into productive surplus, it makes for 
industrial health and growth. To divert rents or 
surplus profits into a fund for securing a fuller 
subsistence for wage-earners and for enabling 
them to acquire for themselves and their families 
a larger share of the comforts and conveniences 
of civilized life, with ampler leisure, recreation 
and education, is a double social gain. It en- 
hances the amount of utility and satisfaction got 
from the income thus directed, and it promotes 



216 THE SCIENCE OF WEALTH 

industrial progress by raising the efficiency of 
labour. 

The contribution of a reasonable labour policy 
to a social policy is best illustrated by the struggle 
for the "minimum standard." Whatever be the 
exact form or contents of our conception of social 
progress, it demands as a first indispensable con- 
dition a solution of the economic problem of 
poverty. This problem is of complex structure, 
distinguishable into several strata. At the 
bottom it appears as destitution, and the slowly 
but surely growing recognition that the safety 
of society requires the abolition of destitution 
has brought the State at many points into sym- 
pathetic contact with the Labour Movement. 
Public opinion everywhere demands that preven- 
tive measures shall be taken by society against 
low wages, over-work, neglected childhood, in- 
sanitary housing, sickness, accidents, intem- 
perance, unemployment, helpless age, adequate 
public remedies being substituted for inadequate 
and degrading private charity. 

For this purpose a series of public health, 
educational, industrial and philanthropic pro- 
visions are in course of adoption by modern 
States, based upon two assumptions: first, that 
large sections of the working classes are unable, 
as individuals or by private co-operation, to 
make adequate provision against many inju- 



THE LABOUR MOVEMENT 217 

rious and degrading incidents of their economic 
situation; secondly, that it is a sound social policy 
to utilize the resources of the State to assist them 
in doing what they cannot do themselves. Free 
hospitals, old age pensions, fuller provision 
against unemployment, and wages boards are 
illustrations of several branches of this new State 
policy. 

It is noteworthy that in all these services the 
State is supplementing or displacing recognized 
activities of the Labour Movement, and is being 
brought at several points into direct co-operation 
with that movement. 

But security against physical destitution is 
no sufficient foundation for a civilized life. It is 
the interest of every society that all its members 
shall, in return for work rendered to society, enjoy 
an income sufficient to enable them to main- 
tain themselves and their family in full physical 
efficiency, with access to all reasonable oppor- 
tunities of general and technical education, and 
to such social intercourse, recreation and liberty 
of travel, as are needed for a good workman and 
citizen. Now modern statesmen clearly recog- 
nize that for the great mass of workers some or 
all of these socially desirable conditions are not 
attainable by individual or collective bargain- 
ing. Neither competition nor combination in 
modern industry yields to workmen any suffi- 



218 THE SCIENCE OF WEALTH 

cient security for such a standard of work and 
life as is required. The State must supplement 
the labour policy. It does so directly in two 
ways. First, it imposes conditions of employ- 
ment expressly designed to regulate wages, hours 
or other conditions in a manner favourable to 
the workers. The Wage Board experiment in 
Australia is the most advanced example of a 
policy which in this country is at present con- 
fined to a few selected "sweated" trades. But 
State regulation of wages here applies not only 
to the growing number of public employees 
but to the large amount of private industry 
affected by public contracts. The policy here 
pursued is a definite recognition that pri- 
vate bargaining does not secure conditions of 
labour conducive to the social welfare. The 
great body of modern industrial legislation 
in Factory and Workshops Acts, Employers' 
Liability, Shop-hours and other regulative Acts, 
is an expression of this fuller policy of pro- 
tection for labour. It is a piecemeal endeavour 
to build up a standard of employment con- 
sistent with the minimum demands of our cur- 
rent civilization. 

It is reinforced by another body of State regu- 
lations which, regarded from the standpoint of 
the workers, aim at improving their standard 
of living. Under this head may be grouped 



THE LABOUR MOVEMENT 219 

much sanitary legislation, food adulteration Acts, 
and other protection against dangerous goods and 
services, while free or subsidized education and 
recreation, including libraries, parks, baths 
and other amenities, may be brought under the 
same policy. The chief economic effect of these 
various public services is to enable the workers 
to make a better or a more economical use of 
their earnings than they could under a com- 
plete system of laissez-faire, and to furnish to 
them at the public cost certain services they 
could not otherwise obtain. Regarded from the 
special standpoint of the economic interests of 
the working classes, this double set of State 
activities is engaged in expending pubhc re- 
sources to build up a minimum standard of 
health, knowledge, enjoyment, taste, character 
and conduct, for those classes who are unable 
to make an adequate provision for these things 
out of the income they earn by the sale of their 
labour-power. It is an elaborate indirect at- 
tempt to readjust the adverse conditions of the 
wage-bargain. 

This is, of course, but a one-sided and partial 
interpretation of a wider social policy. For 
while some of this public work and expenditure 
has exclusive reference to wage-earners, much 
of it claims a fuller social bearing. Though the 
poorer classes may get most benefit out of public 



220 THE SCIENCE OF WEALTH 

money si)ent on education, recreation and even 
sanitation, it will be rightly held that these ser- 
vices are directed and intended less to fill the 
deficiencies of a class than to protect and im- 
prove the social organism as a whole. When we 
approach the higher grades of State activity, 
such as higher education, the encouragement of 
science, literature and the fine arts, the expendi- 
ture upon transport or the aesthetic improvement 
of our cities, we recognize that the social policy 
is less and less identified with the interests of 
any class. 

These State services, anti-destitutional, edu- 
cational, developmental, together with those 
defensive services which consume so much of 
the revenue of most States, involve the expendi- 
ture of a large and growing public revenue. The 
provision of this revenue itself occupies a place 
of growing prominence in the art of government. 
The chief difficulty in this art of pubhc finance 
arises from a defective understanding of the 
part played by the State in industry and there- 
fore of its claim to revenue. The notion that 
the State exists merely to protect the lives and 
property of individual citizens, and that for the 
performance of this duty it is entitled to exact 
a contribution from each citizen, proportionate 
either to his means or to the protective benefit 
he receives from the State, still underlies the 



THE LABOUR MOVEMENT 221 

common conception of public revenue. The 
effect of this view has been to impose narrow 
Hmits upon State activities, and to regard the 
greater part of the pubKc revenue as derived 
from confiscation of the property of individual 
citizens. 

At the present time the theory and practice 
of public revenue is slowly emerging from these 
misconceptions. On the one hand, we see most 
civilized States transgressing the old protective 
limits by engaging in a large variety of construc- 
tive measures for the development of the eco- 
nomic and human resources of the nation. On 
the other, we see a growing recognition of public 
revenue as an income to which the State has a 
right, on the ground that public services have 
earned it. This latter doctrine is, indeed, as yet 
not accepted in its completeness, except as re- 
gards the public revenue taken in the ordinary 
way as profit or rent from publicly owned prop- 
erty or publicly administered industries. The 
rents of public lands, mines, or other estates be- 
longing to the Crown, the profits of the Post 
Ofiice, of a municipal water or tram service, are 
evidently public income on the same footing 
with the similarly earned income of any pri- 
vate corporation. Wherever the State or 
city performs a particular service and takes 
a price from the recipient, whether that price 



222 THE SCIENCE OF WEALTH 

is paid retail, as in the case of the Post 
Office, or wholesale as by some annual rate 
or fee, the public evidently ranks with other 
businesses and has the same sort of right to 
its profit. 

Of course the public may abuse the right, ex- 
acting a higher payment than it ought for what 
it sells. Being usually a monopolist, excluding 
or limiting private enterprise, it is often in a 
position to abuse its power of fixing prices. Many 
of the services it undertakes are for the supply of 
necessaries or primary conveniences of life, such 
as transport, water, lighting. It is therefore able 
to swell the public revenue by exacting what 
would be in a private business surplus-profit. 
Some States and cities practise this finance, 
using certain monopolies, such as salt, matches, 
tobacco, alcohol, as instruments of public revenue. 
This is sometimes denounced as if it were an 
abuse precisely on all fours with the similar 
exactions of a trust or other monopoly in the 
business world. But it is not. For there are 
two differences. The surplus-profits of a State 
monopoly, though unearned by the specific ser- 
vices rendered, go to a public income designed 
for expenditure upon socially useful services, 
whereas the surplus-profit of a private trust 
goes to swell an unproductive surplus of private 
individuals. Again, the high prices exacted by 



THE LABOUR MOVEMENT 223 

the State may be dictated by considerations not 
merely of public revenue, but of public order, 
as in the case of alcohol or explosives. 

But when a public monopoly is made a means 
of exacting profits higher than the ordinary 
business rate, it must be admitted that this 
excess is of the nature of taxation and must be 
defended as much. It is, therefore, to the new 
conception of taxation as the chief means of 
providing public revenue that we must turn for 
an understanding of the relations of the State 
towards the industrial system. This new con- 
ception takes practical, experimental shape in 
the distinction between earned and unearned 
income, and in the insistence that the State has 
a right to share in the latter. Indeed, it is evi- 
dent that to elements of private income and 
property regarded as "unearned" every modern 
State is beginning more and more to look for 
the increasing revenue required to fulfil the 
larger modern functions of a progressive State. 
The two conceptions react on one another. The 
perception that there are "large unearned" 
sources of wealth to tap enables and incites 
modern States and cities to undertake new con- 
structive services in education, housing, town- 
planning, "social reform," which were not 
formerly considered financially feasible. This 
fuller realization, on the other hand, of what a 






%M THE SCIENCE OF WEALTH 

State or city can and ought to do for the com- 
mon good, incites governments to a clearer 
recognition and a closer scrutiny of "unearned" 
wealth. 

The self-interest of governments is every- 
where driving them to seek more public revenue 
from "unearned" incomes and property. Such 
finance, at any rate in countries where forms of 
representative government prevail, lies along 
the line of least resistance. Everjrwhere it is 
felt and seen that rents of land, profits and 
dividends from liquor licences and from other 
businesses which, escaping the full brunt of com- 
petition, are able to regulate output and selling 
price, contain large elements of gain which 
can be taxed without injury to the industries 
affected. 

If it were possible to track down all sorts of 
unearned wealth to a single source, as do some 
of the disciples of Henry George, or even to a 
few clearly ascertainable and measurable sources, 
a fairly simple policy of securing such wealth 
for public revenue might be enforced. One of 
two methods could be adopted: nationalization 
or specific taxation. The first method would 
mean the acquisition and ownership by public 
authorities of the land, or of such portions as 
possessed any considerable amount of present 
or prospective land- values. The effective work- 
ing of this ownership policy might also necessi- 



THE LABOUR MOVEMENT 225 

tate the public ownership and operation of rail- 
ways, mines and quarries, and perhaps buildings, 
as being in such intimate connection with the 
land as to suck value out of it. Along with this 
would go the public ownership of other natural 
monopolies, the retail liquor trade, banking and 
insurance, the telegraph, telephone, and some 
other means of transport and communication, 
the chief municipal services, and perhaps certain 
of the distributive trades in which the arts of 
combination or adulteration were likely to be 
used by private traders to the pubHc detriment. 
This limited State Socialism, though motived 
partly by other considerations, such as the de- 
fence of the consuming public against high prices 
or inferior qualities of goods or services, would 
be directed primarily to secure public revenue. 
It would furnish the State income from the 
ownership and operation of monopolies. 

The other method would leave the land, the 
railways and other instruments of "surplus" 
income in private possession and use, but would 
secure for the State such share of the surplus 
as it required by direct taxation. Economists 
have agreed that taxes upon economic rents of 
land cannot be shifted, and that not only do 
they inflict no injury upon the socially advan- 
tageous uses of land, but they may be so applied 
as to improve those uses. What holds of the 



226 THE SCIENCE OF WEALTH 

rents of land, holds also of other monopoly 
values. Since the monopolist has usually fixed 
the rents or other charges for the goods or ser- 
vices he sells at the figure which he estimates 
will yield him the largest amount of revenue, 
he will not raise his prices in consequence of the 
taxation he is called upon to bear. For it will 
not usually pay him to do so. The taxation is 
likely to stimulate him to more economy in 
methods of conducting his business, as it stimu- 
lates the landowner to put his land to more 
profitable use. It will not induce him to restrict 
his output, or to withhold any personal service 
which hitherto he had given forth. This eco- 
nomic doctrine of the taxation of "monopolies" 
is generally accepted. 

But the analysis of industrial processes set 
forth in this book indicates a much wider and 
more various application. For if it be the case 
that surplus income emerges not only from the 
possession of land or of some few definite "mo- 
nopolies," but from a great number and variety 
of circumstances and situations which afford a 
scarcity value to some sort of capital or ability 
that has gained a "coign of vantage," the amount 
of " surplus" available for public revenue through 
taxation is greatly enlarged. The profitable 
fruits of business trusts, combinations, pools and 
price-agreements, the gains from corners or 



THE LABOUR MOVEMENT 227 

manipulation of markets, from tariffs, charters 
or other pubhc aids, from inventions or superior 
business organization, from high fees and sala- 
ries, are all in various degrees amenable to the 
taxing policy. The fact that most of these 
businesses or professional activities involve a 
genuine output of useful personal ability, though 
complicating the taxing policy, does not affect 
the principle. The incomes derived from them 
contain elements of scarcity value, unearned 
elements which, though not directly separable 
from the necessary wage of ability, or minimum 
interest and profit, are nevertheless a proper 
object for taxation. Some of them are as large 
and more enduring than the incomes derived 
from city lands or liquor licences, others are 
fortuitous and fluctuating. But, forming as 
they do a very large share of the unproductive 
surplus, public policy requires that due atten- 
tion be devoted to them as a source of public 
revenue. 

Their complex character and the difficulty 
of measuring them, however, render specific 
taxation unsuitable. The variety, complexity 
and aggregate size of these more shifting 
"surpluses" furnish the true economic justi- 
fication for general progressive taxation of 
incomes and inheritances. All taxes liable 
to fall upon any income which is a true cost 



228 THE SCIENCE OF WEALTH 

of subsistence or of growth, i. e. the efficiency 
wage of labour, the minimum interest, profit 
or other payment of abihty, are bad taxes. For, 
by impairing the efficiency of a factor of pro- 
duction they injure the future production of 
wealth, and reduce the surplus capable of con- 
tributing to future public revenue. All taxation, 
therefore, should be confined to "unproductive 
surplus," taking out of it such revenue as the 
State can advantageously expend in the sus- 
tenance and development of the public services. 
The general income and inheritance taxes, which 
in most civilized states play a part of increasing 
importance, are the best instruments for secur- 
ing this contribution. Their progressive gradua- 
tion is defensible upon the ground that the 
proportion of "unproductive surplus" varies 
directly with the size of the income or estate. 
This supposition may certainly be accepted as 
valid. The larger the income or estate, the 
larger the amount of unproductive surplus it 
usually carries, and so the larger the amount it 
can contribute to the State without injury to 
the factor which received the income. 

The difficulty of discriminating such "un- 
earned" income from the "earned" incomes in 
which it is often incorporated, however, obliges 
the State to proceed in an experimental manner. 
Grave practical difficulties confront a State en- 



THE LABOUR MOVEMENT 229 

deavouring to tax surplus out of large incomes. 
Concealment of income is often possible, and 
modern international finance makes it possible 
and easy for some sorts of "surplus" to dodge 
taxation by emerging abroad and coming home 
in disguise. As internationalism in business 
grows commoner, it will become exceedingly 
difficult for any state to proceed much faster 
than other states in the taxation of current in- 
come. Partly to avoid these difficulties, but 
more largely because inheritances are admittedly 
unearned by the recipients, there is a growing 
disposition to rely upon death duties more than 
upon increased income tax for revenue. 

Financial statesmen have been driven along 
these roads of revenue more by considerations 
of financial opportunism than by the clear-eyed 
acceptance of economic principles. But it is 
particularly desirable for those who realize the 
necessity under which a modern state continually 
finds itself of needing increased revenue, to un- 
derstand the proper sources of taxation and the 
rationale of the taxing process. Taxation is not 
a confiscation of the earned property or income 
of individual citizens, the product of their per- 
sonal effort or ability. It is a means by which 
the State, as the representative of social activi- 
ties and needs, asserts its claim to the income 
which society has earned by the various aids 



230 THE SCIENCE OF WEALTH 

rendered to its individual members. The State 
collects its income through the taxes, and ex- 
pends it, so far as it is rightly advised, in the 
defence, development and improvement of the 
services it renders to society. 



CHAPTER XII 

FOREIGN TRADE 

A CENTURY and a half ago a band of British 
immigrants landing in North America made 
their way into an extreme southern part of the 
province of Ontario, where they settled down in a 
fertile valley traversed by a river, along the banks 
of which they built the clusters of log-huts that 
presently grew into a populous and prosperous 
village. The north side of the river had most of 
the better grazing land, and a creek running down 
from the neighbouring hills made it easier to work 
lumber on that side. But the south side had land 
more fertile for wheat and better protection 
for fruit and vegetables. There were specially 
favourable plots of soil on either side under the 
shelter of the hills, which took the fancy of some 
settlers, and other advantages of climate, soil or 
position, led to special sorts of cultivation and 
industries connected with them. A few smiths, 
carpenters, weavers, tailors, shoemakers, settled, 
according to personal convenience or family con- 
nections, on the north or south side of the stream. 
231 



232 THE SCIENCE OF WEALTH 

Remote from other settlements, this village, with 
its neighbourhood of farmers, lumbermen, etc., 
formed a virtually self-supporting industrial com- 
munity. There was a bridge across the river so 
that persons and goods passed freely to and fro, 
and market arrangements enabled every special 
advantage of soil or position, or any special skill 
which some artisan or manufacturer might pos- 
sess, to be most fully utilized for his personal gain 
and for that of the whole body of customers who 
were free to buy what he had to sell. Here was a 
simple example of the economy of division of 
labour on a basis of free? exchange. It was evi- 
dently advantageous for the villagers living on 
either side of the stream that there should be the 
closest contact and the freest commercial in- 
tercourse over the bridge. Any one suggesting 
that the bridge should be broken down, or that a 
toll should be set up for persons and goods pas- 
sing across, with the object of enabling each side 
to supply its own needs whenever it seemed pos- 
sible to do so, would have been dubbed a lunatic. 
Now it came to pass, after the American revo- 
lution had led to the establishment of the Re- 
public, that a delimitation of frontiers between 
Canada and the new United States took place, 
in which the river passing through our village 
was a boundary line. Politically the village was 
cut in two. The inhabitants of the northern part 



FOREIGN TRADE 233 

remained Canadian citizens, obeying the laws and 
paying the taxes of Ontario as heretofore, the in- 
habitants of the southern part became citizens of 
the United States. In process of time the poKtical 
severance would possibly affect the feelings of the 
two sets of villagers towards one another and 
lead to a diminution of social intercourse. But 
could it make that division of labour and that 
freedom of exchange, which were advantageous 
formerly, less advantageous.^ Would it be any 
less damaging than before to break down that 
bridge, or to put a toll upon the produce which 
sought a market across the stream.?^ It would in- 
deed be feasible, as it was before, to break the 
economic community into two, following the line 
of the river. But it would be just as evident that 
every person who had anything to sell would have 
only half the market he had before, while for every- 
thing he wanted to buy he was similarly restricted 
in the supply available to him. It might be pos- 
sible for all the villagers to supply themselves 
with all they needed by dealing with neighbours 
on their own side of the stream, but they evi- 
dently lose their share of the natural advantages 
or special skill belonging to some villagers upon 
the other side, and the new restrictions on the 
market for the things which they are in a superior 
position to make rob them of part of the fruits 
of their own industry. Each villager manifestly 



234 THE SCIENCE OF WEALTH 

loses, both as buyer and as seller, by any impedi- 
ment put upon that free intercourse which existed 
before. 

The political division does not affect the true 
economy of industry. It was advantageous be- 
fore that the young men and women who grew up 
on the north side should be perfectly free to take 
up land or a trade upon the south side if a better 
opportunity presented itself there than on their 
own side. Such liberty of movement evidently 
led to a better development of the whole district, 
an advantage in which all would share. Similarly, 
if any thrifty farmer on the south had laid by a 
sum of money and saw a better use for his savings 
by putting up a saw-mill on the north side, instead 
of starting some less likely business on his own side, 
it would evidently be detrimental to the interests 
of all the villagers on either side to stop him from 
this most profitable use of his capital. For they 
would all gain more by the cheaper timber his 
saw-mill would supply than by any other use to 
which he could put his savings through employing 
them upon his own side of the stream. Under 
such circumstances any interference with the free 
flow of labour or capital is seen to be as injurious 
as any interference with freedom of markets. For 
the inhabitants of either or both sides to adopt a 
law of settlement which kept the growing popu- 
lation to its own side of the frontiers, or restric- 
tions upon the export of timber or machinery or 



FOREIGN TRADE 235 

other sorts of "capital," or by a tariff to prohibit 
or impede the importation of commodities which 
could be produced better or more cheaply on the 
other side, would manifestly be a suicidal policy. 

If the villagers upon the north out of some 
mistaken patriotism adopted such a policy of 
exclusion, they could damage the villagers of the 
south. But they would damage themselves to a 
somewhat greater extent, because the costs of 
collecting the tolls, keeping out smugglers and 
administering the whole protective policy, would 
fall on them. Supposing, however, that they were 
so foolish as to attempt this economic separation, 
would the villagers of the south be well-advised 
in their turn to meet the injury inflicted on them 
by copying the exclusion policy? Why should they 
stop northern capital which sought to come in 
and develop their resources from doing so, or stop 
skilled labour from crossing the stream to help 
northern capital in their advantageous work? 
Why should they prevent their villagers from 
getting the better or cheaper produce which the 
northerners still sought to supply? To follow the 
bad example of the north would be to double the 
injury for their citizens as well as for the others, 
and to saddle themselves with the same costs of 
administering the exclusive policy. 

So long as the village was all inside Ontario, it 
was quite obvious that the fullest co-operation 
among all its members, by division of labour, 



236 THE SCIENCE OF WEALTH 

freedom of markets and full liberty of movement 
for capital and labour, was conducive to the 
common welfare of the village as a whole and of 
each section of it. It might be true that the soil 
and other natural conditions were upon the whole 
much more favourable on the south than on the 
north, and that consequently the young labour 
and the new savings went chiefly to the develop- 
ment and settlement of that section. But it 
would be quite evident that the villagers who 
stayed on the northern side were not made worse 
off but better off, by reason of the fuller devel- 
opment of the better resources on the southern 
side, and that if any foolish sentiment had oper- 
ated to keep their young labour and the savings 
from seeking more profitable employment across 
the river, they would have been heavy losers. 
Now this evident economy could not be reversed 
or even modified by the purely political event 
which split the little industrial community into 
two political communities. What was good 
business before would remain good now, and any 
political interference with the liberty of move- 
ment for men and goods would evidently injure 
business. For if either of the sections of the 
village could be advantaged by restrictions upon 
free movements of men or goods, it might equally 
be argued that further barriers between the two 
parts of the north divided by the creek which ran 
into the river would be serviceable, at any rate 



FOREIGN TRADE 237 

to one part of the north, and this policy of sub- 
division might be carried so far as to make each 
street and finally each family a self-contained 
individual community. 

This illustration will suffice to set forth the 
simple and sound doctrine of industrial and com- 
mercial relations between nations. What these 
two sections of the frontier village are to one an- 
other, are also the two nations to which they rela- 
tively belong, Canada and the United States. If 
an unimpeded flow of capital and labour and pro- 
ducts is advantageous for both sides of the divided 
village, so is it for the two nations. And what is 
true for Canada and the United States is true for 
any other nations, whether possessing a common 
frontier or not. The inhabitants of every country 
benefit by the freest possible intercourse with all 
other countries, for in that way they can get most 
wealth, utilizing most completely and effectively 
any special qualities of natural resources or 
acquired skill they may possess, and sharing by 
exchange the similar advantages which the in- 
habitants of other countries possess. 

The main currents of modern industrial life 
involve the increasing recognition of this truth. 
Enormous strides in modern industry and wealth 
are attributable to a constant increase in the 
fluidity of capital and labour and commodities. 
Local markets for labour and for goods give place 
to markets over larger areas : the suckage of labour 



238 THE SCIENCE OF WEALTH 

into large industrial towns extends over the whole 
country: modern machinery of investments car- 
ries capital more easily over the whole range of 
national industries. But the flow does not confine 
itself to the limits of a single country or nation. 
The most striking feature of the last generation is 
the expansion of economic internationalism, the 
growing forces that are conveying capital, labour 
and commodities over the whole earth, so as to 
develop more fully the general resources of the 
earth, and to distribute them more advantageously 
for the inhabitants of the earth. About a half of 
the new savings made by citizens of Great Brit- 
ain, finds a more profitable use in other countries, 
and the new capital of France, Holland, Germany, 
and other advanced industrial nations, similarly 
shows a tendency towards increased employment 
abroad. Most of this capital has gone into rail- 
ways and other developmental work, by which 
vast new tracts of land and populations in South 
America, and elsewhere, have been made accessi- 
ble as growing areas for the world-supply of foods 
and raw materials, and as markets for manufac- 
tures. Much capital has also been loaned to for- 
eign governments or to municipalities, and when 
the primary needs of backward countries have 
been met, foreign capital flows into their internal 
industries of manufacture and commerce. Along 
with this flow of capital has gone a flow of labour 
from the more congested or less fertile to the 



FOREIGN TRADE 239 

less congested or more fertile countries. As 
might be expected, the streams of capital and 
labom* have generally taken the same direction, 
the flow from all the European countries into 
North and South America forming by far the 
largest instance of this economic internationalism. 
Not less significant has been the corresponding dis- 
tribution of business ability, engineers, bankers, 
merchants, factory managers, planters, spreading 
in ever growing numbers over the industrial 
world. The common object and result have been 
to "standardize " the world, so far as the roads, 
the structure and equipment of cities and of the 
leading industries are concerned, and even to force 
up towards a common level the practices of hon- 
esty and efficiency for government and business 
life. 

The actual increase of foreign trade and the 
growing relative importance of that trade for 
every country form an aspect of this internation- 
alism closely related to the foreign investment and 
immigration upon which we have dwelt. Though 
Great Britain and a few of the continental coun- 
tries are in advance of the rest, the inhabitants of 
every country in the world are becoming more 
dependent upon the inhabitants of other coun- 
tries for things they want to sell and buy. Every 
year larger and larger quantities of goods flow 
across the national frontiers and seek purchasers 
in foreign markets. 



mo THE SCIENCE OF WEALTH 

Apart from the ordinary exchange of goods 
for goods, the flow of capital to which we have 
alluded involves a large quantity of import and 
export trade. Capital invested abroad goes out 
in the shape of goods, for we have no money to 
send out, and it is not money but money's worth 
in goods that foreign borrowers want. Invest- 
ment of capital abroad, therefore, is only a large 
department of our export trade, implying the sale 
abroad of British engines, rails, machinery and 
other British manufactures, sent out either to the 
country where the borrowers live or to some other 
foreign land. It also involves imports coming 
into this country in payment of interest on the 
capital, and eventually in repayment of that 
capital. For these payments, too, will mainly be 
made in the shape of goods. A very large propor- 
tion of the foreign trade of Great Britain and of 
some other countries consists of this flow of 
capital abroad and the payment of interest in 
return. 

But, apart from this, there is a growing inter- 
change of goods passing by ordinary process of 
exchange between countries which are different 
in their resources and their industries and which 
find such exchange the cheapest way of getting 
what their people want. 

This flow of the factors of production and 
their products across national barriers is going 
on at an accelerating pace, and has important 



FOREIGN TRADE 241 

results, political as well as economic. It binds 
members of different political communities more 
closely by bonds of plain business interest. The 
striking fact that the people of Great Britain 
draw not much less than one-tenth of their total 
income in interest from overseas investments is 
not rendered less significant by the knowledge 
that the great bulk of this income is enjoyed by 
a very small class of well-to-do people. For it 
means that one-tenth of "economic England,'* 
in the sense of the property owned by English- 
men, lies outside these isles, in various parts of 
the habitable globe. This means a powerful in- 
terest in the peace, well-being and progress of 
those foreign countries, felt by those Englishmen 
who own this property and receive this income. 
When we reflect that the growth of this cross- 
ownership between members of different nations 
is going on everywhere, and that as intelligence, 
ease of transport, and security of government in- 
crease, so will this cross-ownership increase, we 
cannot fail to recognize it as the most powerful 
material factor in internationalism. As its chief 
direct effect is to make countries better known 
and more accessible to one another, it evidently 
lays the foundation for an enlarged and more 
regular flow of ordinary trade. 

These broad world tendencies towards inter- 
nationalization of industry do not, however. 



242 THE SCIENCE OF WEALTH 

work unimpeded. Political interests, real or 
imaginary, impel governments in many countries 
to place obstacles on the free passage of persons or 
of goods from one country to another. Consider- 
ations, partly social, partly economic, have caused 
some new countries to impose prohibitions and 
restrictions upon immigration, so as to regulate 
its pace and character. This has operated as a 
very considerable check upon the flow of labour 
from Asia into the United States and our self- 
governing colonies, and to a less extent upon 
immigration from European countries. This 
policy has been motived partly by the determina- 
tion of the working classes in new countries to 
defend their standard of wages and of living 
against the competition of new-comers accustomed 
to a lower standard. Though economists point 
out that the usual effect of admitting such immi- 
grants has been, not the displacement of native 
labour, but its elevation to a higher level of em- 
ployment, and that the early development of the 
rich resources of such lands as British Columbia 
and North Queensland is impossible without the 
free admission of lower races, such arguments 
do not generally prevail. The restrictive policy 
is defended by political and moral considerations 
relating to the difficulties of assimilating and con- 
verting into good citizens large masses of aliens 
of widely different stock and habits from those 
of the existing inhabitants of the country. For 



FOREIGN TRADE 243 

these and other reasons considerable checks are 
placed upon that free fluidity of labour which 
seems conducive to world-industry. 

Most modern states, partly for purposes of 
revenue, partly because they wish to keep their 
home markets for their home producers and to 
make their country as economically self-support- 
ing as possible, impose restrictions upon the free 
importation of foreign goods. Some they strive 
to keep out, others to admit with duties which 
reduce their quantity and raise the price. The 
tendency towards periodic gluts under modern 
industrial conditions has impressed upon most 
nations the difficulty of finding sufficient markets 
for the goods their producers can turn out, and 
has led them to suppose that, by keeping their 
own markets to themselves as much as possible 
they were increasing the total quantity of market 
for their national trades. But this they cannot 
do. For there is no way of increasing either the 
total wealth or the total market of a country by 
impeding freedom of exchange. On the contrary, 
every impediment must diminish the average pro- 
ductivity and the reward of capital and labour 
inside the protected area, as was evident in the 
case of our divided village. It is only by looking 
at one trade at a time, or trade with one country 
at a time, or trade for a brief selected period, or by 
some other "separatist " and fallacious considera- 
tion, that protection can be made to seem a 



244 THE SCIENCE OF WEALTH 

profitable economic policy to any nation. Cer- 
tain favoured protected classes or industries can 
gain at the expense of others, but the wealth of 
the nation as a whole must be diminished. This 
consideration of wealth may, of course, be offset 
by some other consideration such as national de- 
fence or variety of occupation. But it is well to 
recognize quite clearly that any military or other 
object gained by a protective tariff must be paid 
for in economic wealth. 

Much confusion of thought is due to the habit 
of speaking of nations as if they were trading 
bodies, and of citing records of imports and ex- 
ports as if they were national balance sheets ex- 
hibiting the sales and purchases of nations. Na- 
tions are not commercial units. Germany, Great 
Britain, the United States, do not trade with one 
another, nor do they compete with one another 
to sell to other nations. Certain persons or firms 
in Great Britain sell to or buy from certain persons 
or firms in Germany or the United States, and 
vice versa. German firms compete with English 
firms for orders from other business men in Eng- 
land and Germany or elsewhere, but the compe- 
tition of the German firms with one another, 
and of the English firms with one another, is more 
incessant and keener than that between firms of 
different nationality. Kent hop-growers fear the 
rivalry of Sussex hop-growers more than of French 



FOREIGN TEADE 245 

or Germans, and would benefit much more by their 
exclusion or taxation. 

The false notion that nations trade is accom- 
panied by the equally false notion that in the 
processes of so-called international trade the in- 
terests of the several nations are opposed to one 
another. This fallacy is attributable to that mis- 
conception of trade which lays more stress upon 
the selling than the buying side. Because business 
men in the same trade find themselves rivals in 
the markets where they meet, they wrongly con- 
clude that trade is composed of warring interests. 
Yet this is manifestly false. Our analysis of the 
industrial system shows it as essentially co-opera- 
tive, competition only serving as an instrument 
in the co-operative process. Only by isolating the 
selling side of a business does trade appear in 
essence hostile. For trade does not consist in 
buying or in selling, but in both; it consists in 
exchanges between goods, which are only effected 
by the sale of one set of goods and the purchase of 
another. If an English business man buys goods 
from a German firm, he compels that German to 
buy English goods which would not otherwise 
have been bought, or to get some other person to 
do so. If an Englishman sells goods to a Ger- 
man, he compels some English firm to buy Ger- 
man or other foreign goods which would not 
otherwise have been bought. Exactly how this is 
brought about need not concern us here, but it is 



246 THE SCIENCE OF WEALTH 

evident that, since money does not pass between 
the two countries to any appreciable extent, pay- 
ment for goods passing from one country is taken 
in goods passing the other way. Since the gain 
of trade to every person engaged in it comes 
equally by selling well and by buying well, it fol- 
lows that he gains most who has access to the 
largest and freest market for both purposes. And 
since a nation consists of a number of individuals 
whose interests thus lie in selling and buying 
freely in the world market, the policy is also the 
true economic policy from the national stand- 
point. A state, therefore, which prevents its citi- 
zens from buying or selling abroad as freely as at 
home, injures their economic welfare, reducing the 
aggregate wealth of the nation. 

The tariffs, treaties and other trade policies 
which states adopt, regulating the trade done by 
their own subjects with the subjects of foreign 
states, have, however, an excessive importance 
attached to them. Considerable as their influ- 
ence is in determining the import and export 
trade between certain countries, they are not com- 
parable in power with the great economic ten- 
dencies towards internationalism which we have 
described. The real interests of investors, mer- 
chants and wage-earners lie in the direction of 
the freest possible flow of capital and labour and 
the freest possible exchange of goods, and the 



FOREIGN TRADE 247 

magnitude and variety of this economic inter- 
course between the different countries of the 
world are continually increasing. 

One point relating to imports requires atten- 
tion. It is sometimes held that import duties need 
not be considered impediments to trade, but that 
they are means by which foreigners can be made 
to contribute to our public revenue. The foreign 
goods will come in as before, paying a tax which 
will not raise their price but will be taken out of 
the profits of foreign producers, merchants or 
shippers. Now the validity of the contention can 
be tested by the general law of taxation, derived 
from the distinction between costs and unproduc- 
tive surplus. It is simply the question of the 
effect of taxing different sorts of goods. Whether 
the goods taxed are foreign imported goods or 
home produce makes no difference. If a tax is 
placed upon goods produced under such competi- 
tive conditions as keep prices at a level which only 
covers the ordinary costs of production, it cannot 
be defrayed by the producers. For it will check 
production, reducing the supply of goods and 
raising their price, thus throwing the burden on 
the consumer. This applies equally to domestic 
or to foreign goods. If, however, there are cases 
where imported goods sell at prices which con- 
tain a "surplus" over the necessary costs the 
foreigner can afford to pay. If his own Govern- 



248 THE SCIENCE OF WEALTH 

ment has neglected to take advantage of its prior 
opportunity to tax his "surplus," a foreign Gov- 
ernment might do so by means of import duties. 
But only in such exceptional cases can the for- 
eigner be made to pay. 



CHAPTER XIII 

HUMAN VALUES 

Our survey of industry shows us an elaborate 
system of businesses and trades by which the 
productive powers of Nature and of man are 
brought into operation for the supply of human 
wants. This system exhibits much detailed skill 
of adaptation and co-operation. The harmony 
of structure and of working in an ordinary 
modern business, a factory, a mine, a bank, a 
shop, is very exact. Though the owners of the 
different factors of production in the business 
are mainly moved by considerations of personal 
gain, viz. the wages, interest, rent, profits they 
expect to receive, there is a sufficiently close and 
constant harmony of these individual interests 
to supply a sound business economy. Though 
friction causes some evident waste, and larger 
disturbances sometimes arise, the ordinary busi- 
ness works harmoniously and economically at 
most times. 

When we turn to the group of businesses 
which form a trade, and to the series of trades 
249 



250 THE SCIENCE OF WEALTH 

required to supply some sort of commodity to 
consumers, we still find a remarkable amount 
of accurate adjustment. If we consider the 
enormous number of minutely divided activities 
required to furnish London with any of its food 
supplies, the working of the industrial machinery 
appears marvellous. But here closer inspection 
shows much greater irregularity and waste. 
Twenty businesses are often engaged in doing 
the work which ten, or even five, could do as 
well; congestions and temporary stoppages of 
considerable magnitude occur; there is a good 
deal of miscalculation and of misdirected energy. 
The economy of a trade structure is evidently 
less exact than that of a business. The needs of 
humanity require, however, that a great variety 
of trades shall produce, carry, and distribute 
innumerable goods in the proper proportions 
simultaneously and continuously at ten thousand 
different places. We have seen how this is 
achieved by the establishment of an industrial 
system which sets the required quantity of land, 
capital, labour and ability in operation at each 
point of industry, and causes the new flow of 
capital and labour to repair the waste and to 
provide for growth. Few of the millions engaged 
in such work know or care at all for the larger 
purpose which this work serves. The farmer in 
Argentina or Alberta, who is preparing bread 



HUMAN VALUES 251 

for families in Manchester or Dresden, is not 
consciously concerned with any step beyond his 
bargain for delivery of the wheat at the elevator 
or the nearest railroad. 

As we pass from the single compact business to 
the wider system, less and less clear conscious 
purpose appears to animate the system. And 
yet, as we see, a good deal of order emerges in 
the working of the whole. This order, however, 
is attended also by a good deal of disorder. The 
modern industrial system as a whole does not 
exhibit anything like the same degree of har- 
mony or economy as is found in the single busi- 
ness. This is natural enough. For we saw that 
in the business a single control existed and a 
single dominant purpose, that of profit-making. 
Now in the industrial system as a whole there 
is no adequate central control or purpose. To a 
large extent, indeed, finance constitutes a sort of 
central power station for the distribution of 
capital and labour. But its grasp is very partial, 
and its methods are not accurately adjusted 
to supply the general needs of industry. The 
central purpose, as we see, is the regular supply 
of the needs of consumers. And it is this purpose 
which does maintain such harmony as is found 
in the industrial system. But the elaborate 
circuitous ways by which the interests of the 
consumer operate through the veins of industry 



252 THE SCIENCE OF WEALTH 

are a poor substitute for the keen interest of the 
profit-maker in the organization of the business 
cell. No conscious controlling motive of social 
profit-making animates the whole. 

Some indication of the nature and some of 
the extent of this harmony and discord has 
been given in the distinction between costs and 
surplus which our analysis disclosed. So far as 
costs of maintenance for the various factors of 
production was concerned, we recognized that 
the industrial system worked almost automati- 
cally and accurately. With regard to costs of 
growth, though there was an ultimate harmony 
of interests between the factors, present con- 
siderations of gain caused discords to arise, a 
scarcer and therefore stronger factor encroach- 
ing upon the fund needed for the growth of some 
other factor, and taking for itself some surplus- 
gain. The needs and claims of the State, we also 
saw, were liable to similar depredations on the 
part of a powerful factor of production. 

The discord and waste thus caused was not, 
we saw, measured merely by the quantity of 
surplus-wealth thus taken. For a proper distri- 
bution and utilization of the whole product 
would maintain a larger volume of production, 
giving full regular employment not merely to 
the existing industrial structure but to a structure 
enlarged by a better apportionment of nutriment 
to the separate parts. 



HUMAN VALUES 253 

A first line of social-economic reform is sug- 
gested by such analysis. The absorption and 
social utilization of the whole surplus, by con- 
verting the unproductive surplus into a pro- 
ductive service for labour and the State, would 
secure for industry as a whole a harmony resem- 
bling that which prevails in a well-ordered single 
business. Though the owners of the several 
factors of production, and the several businesses 
and trades, would each continue to endeavour to 
secure for themselves the largest payment, the 
economy of distribution which prevailed would 
keep them working together in economy and 
harmony. This is the ideal which laissez-faire^ 
operating on a false basis of unequal opportunity, 
has often claimed but always failed to secure. 

But in no case could mere self-interest of 
the separate factors, however enlightened, suffice 
for social harmony in industry. For we have 
seen that such a harmony of individual interests 
leaves out of account the claims of society, as 
an organic whole, expressed through the State. 
Now society, we recognize, must be considered 
as co-operating everywhere with the individual 
owners of land, labour, capital and ability, and 
as entitled to a regulative voice in industry and 
to its share of the industrial product. This 
truth is everywhere finding expression in the 
enlarged economic activities of modern States. 



254 THE SCIENCE OF WEALTH 

Though there is no general tendency of con- 
scious policy vesting in the State the ownership 
and operation of all industries, the State in every 
civilized country is entrusted with growing 
regulative powers over private industry, designed, 
first, for the protection of its members, as workers, 
consumers, or citizens, against risks or injuries 
incident to profitable processes; secondly, for the 
direct participation of the public in the wealth 
which social as well as individual energies have 
helped to produce. 

The complete measure of State Socialism is 
commonly applied only to such economic pro- 
cesses as, left in private hands, tend either to 
become monopolies, or to breed dangers or dis- 
orders which defy mere regulation. To these 
are added, in some countries, trades which are 
made convenient instruments of public revenue. 
Though the economies of modern capitalistic pro- 
duction, and growing facilities of combinations 
of large businesses drive an increasing number of 
trades into this condition of monopoly or defec- 
tive competition, qualifying them for public 
enterprise, it cannot be concluded that these 
concentrative forces are of universal or of general 
application. Moreover, even in cases where they 
operate powerfully, the public policy in dealing 
with them will be determined by the capacity 
of the State to undertake in the public interest 



HUMAN VALUES 255 

the conduct of such industries. "WTiere the 
State feels competent to undertake an industry, 
or where the difficulties of mere regulation seem 
too great, full socialization will occur. But 
when the State does not possess the requisite 
strength, skill or integrity, the social interest 
may be better secured by regulation and partici- 
pation in the surplus profits of the trade. The 
particular industries subjected to one process or 
the other will vary with the degree and char- 
acter of economical and political development 
attained in the several countries. But every- 
where the State, as a social instnmient, will be 
found playing a larger economic role as manager 
or regulator of industry and as participator in 
the income which it yields. 

The essential meaning and value of these 
processes lie in their contribution to the wider 
and more human art of wealth. This art of 
wealth they further in two ways. By removing 
from private income unearned and excessive 
elements which by their payment and expendi- 
ture represent waste, and by applying such in- 
come to socially serviceable uses, they impart 
increased health and vigour to the industrial 
system and enlarge the aggregate of satisfaction 
it affords by the consumption of the product. 
By establishing a more adequate central direc- 
tion over industry, commensurate to its increas- 



256 THE SCIENCE OF WEALTH 

ing complexity, they abate the waste of friction 
due to conflicts of interest among individuals 
and groups, and make for the production of a 
maximum of human utilities with a minimum of 
human costs. 



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